metadata: authors: 0: author: Bird,Richard M.
docna: 0: docna: Decentralizing infrastructure : for good or ill?
docty: Policy Research Working Paper
subtopic: Economic Theory & Research,Industrial Economics,Sanitation and Sewerage,Engineering,Telecommunications Infrastructure,Public Sector Administrative & Civil
            Service Reform,Water and Human Health,Hydrology,Economic Growth,Water Supply and Sanitation Economics,Sanitary Environmental Engineering,Small Private Water Supply Providers,Environmental Engineering,Town Water Supply and Sanitation,Democratic Government,Public Sector Administrative and Civil
            Service Reform,De Facto Governments
teratopic: Finance and Financial Sector Development
abstracts: cdata!: The author examines the many faces of
            infrastructure decentralization: the costs and benefits, the
            government structure (constraint or variable?), the
            "polycentric" approach, and how to make
            decentralization work (for whom?). He proposes basic
            principles and guidelines for policy design, for both small
            projects and large. Broadly, these guidelines are summed up
            in a few propositions. In all countries, some critical
            infrastructure is provided through a decentralized political
            structure. Current trends make that likely to be more true
            in the future. Decentralization, however defined, in and of
            itself had no necessary implications for good or evil so far
            as infrastructure is concerned: its effects depend on the
            incentives various decisionmakers face. The key to ensuring
            that these incentives are conducive to "good"
            decisions (about design, siting, timing, finance, pricing,
            operation, maintenance, and use of infrastructure) is to
            ensure that those who made the decisions bear the financial
            (and political) consequences, as much as possible.
            Politically, this means that political leaders at all levels
            should be responsive and responsible to their constituents,
            and that those constituents are fully informed about the
            consequences of all decisions. Making politicians bear the
            consequences of their own mistakes is as close as one can
            get to a "hard" political budget constraint.
            Economically, it must be difficult for local residents to
            shift cost to nonresidents who do not receive benefits and
            to make local decisionmakers fully responsible to their
            citizens for the use they make of revenues collected from
            them (through local taxes), to users of infrastructure
            (local or otherwise) for the use made of the revenues they
            contribute (through user charges of various sorts), and to
            taxpayers in general for the use made of any transfers (or
            subsidized loans) they receive. Administratively, what such
            a system requires is a clear set of "framework"
            laws (on local budgeting, financial reporting, taxation,
            contracting, dispute settlement, rules to be followed in
            designing user charges and so on), as well as adequate
            institutional support for localities to operate in this
            environment. To the extent that these conditions are not
            met, the perverse incentives that too often exist because of
            the structure and finance of the public sector in many
            countries will probably be exacerbated by the current
            tendency to decentralize more and more decisions in the
            public sector.
repnme: repnme: Decentralizing infrastructure : for good or ill?
display_title: Decentralizing infrastructure : for
            good or ill
listing_relative_url: /research/1994/02/698615/decentralizing-infrastructure-good-or-ill
topicv3: Economic Growth m1326241 471,Water m1326522 137,Telecommunications and Broadband Access
            m1327340 286,Wastewater Collection m1327591 148,Public Administration m1327723 723
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Finance and Financial Sector Development
origu: Off of Sr VP Dev Econ/Chief Econ (DECVP)
no_of_pages: 38
author_keys: 0: author_key: 86473
model_extractions: POLICY **RESEARCH WORKING PAPER** 1258

# **Summary findings**

Bird examines the many faces of infrastructure decentralization: the costs and benefits, the government structure (constraint or variable?), the "polycentric" approachi, and how to make decentralization work (for whom?). He proposes basic principles and guidelines for policy design, for both small projects and large.

Broadly, these guidelines are summed up in a few propositions:

* In all countries, some critical infrastructure is provided through a decentralized political structure. Cuirant trends make that likely to be more true in the futire.

* Decentralization, however defined, in and of itself has no necessary implications for good or evil so far as infrastructure is concerned: its effects depend on the incentives various decisionmakers face.

* The key to ensuring that these incentives are conducive to "good" decisions (about design, siting, timing, finance, pricing, operation, maintenance, and use of infrastructure) is to ensure that those who made the decisions bear the financial (and political) consequences, as much as possible.

* Politically, this means that political leaders at all levels should be responsive and responsible to their constituents, and that those constituents are fully

informed about the consequences of all decisions. Making politicians bear the consequences of their own mistak-s is as close as one can get to a "hard" political budget constraint.

* Economically, it must be difficult for local residents to shift costs to nonresidents who do not receive benefits and to make Iccal decisionmakers ful!v responsible to their citizens for the use they make of revenues collected from them (through local taxes), to users of infrastructure (local or otherwise) for the use made of the reventies they contribute (through user charges of various sorts), and to taxpayers in general for the use made of any transfers (or subsidized loans) they receive.

* Administratively, what such a syscem requires is a clear set of "framework" laws (on local budgeting, financial reporting, taxation. contracting, dispute settlement, rules to be followed in designing user charges, and so on), as well as adequate institutional support for localities to operate in this environment.

To tne extent that these conditions are not met, the perverse incenti'.es that too often exist because of the strucolre and finance of the public sector in many countries will probably be exacerbated by the current tendency to decentralize more and more decisions in the public sector.

- - This paper a product of the Office of the Vice President, Development Econcnics is ont in a series of background papers prepared _for WorldDevelopment Report_ 1994 **onI** infrastructure. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Pltase contact the World _Development Report_ office, room T7-1 01, extenision 31393 (34 pages). February 1994.

_The Policy Resea ch Working Paper Series disseminates the findings of_ **_work_** _in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be used and cited accordingly. The findings, ;nterpretations, and conclusions are the authors'_ **_oun_** _and should not be atf-ibuted to the World Bank, its Executive Board of Directors, or any of its member countries._ Produced by the Policy Research Dissemination Center
# _Background Paper for_ **_the_** _1994 World Development Report (forthcoming)_

DECENTRALIZING INFRASTRUCTURE: For good or for ill?

Richard M. Bird University of Toronto
DxlcentrizIng **Infrastructure:** For good or for M1?

Introducdon Te may facs of decentralization The benefits and costs of decentralization Government structure: constraint or variable? The opolycentric" approach Infrastructure for whom? How to make decentralization work Guidelines for policy design The basic principles Small projects Large projecu

# Conclusion

References
3

# List of Boxes

1. Altenative ways to provide local infrastructure

2. Infrastructure for whom?

3. The informal financing of infrastructure 4. Decentralizing infrastructure: the problem of technical capacity

- S. Giving the wrong signals to local govermment

6. Local policies can make a difference 7. Accommodating local diversity 8. Enforcing local accountability 9. User-Inanced infrastructure 10. Earmarling: good or bad?

11. The virtues and pitfalls of matching grants 12. Local borrowing 13. The recurrent cost problem 14. Evaluation and accountability _15._ Local government 'clubs'
4 Investment in physical infrastructure (e.g. water, sewerage, roads, transit, power, telecommunications) has long been considered to be important for economic growth. Indeed, some of the earlier writings on economi( growth, like some of the early prctices of agencies dispensing foreign aid, appear simply to have assumed that investment in infastructure was not only a necesary but almost a sufficient condition for growth. Although subsequent analysis and experience has undermined this simple belief, several recet studies have again awakened interest in the connection between public sector investment in infrastructure and private investment and economic growth.' Whatever the stren of the connection between infstructure and economic growth, infrastructure investments almost invariably constitute the core of both national and regional developmet policy in most countries. Infhstructure investment projects, and the services they provide, are inherently located,in, and serve, particular areas and customers . A road built in the middle of an uninhabited desert is not the same as a road built in a major urban area, even if the physical characteristics of the two projects - the thickness of the pavement, the width of the roadway, etc. - are identical. The productivity (in terms of growth) of an infrastructire project thus depends largely upon its environment - upon where it is located. Moreover, location also determines to a considerabl **e** xtent who benefits from infrastrucure investment: water supply systems with pipes that serve only the rich do not do much for the poor. The efficiency and equity of any particular investmen **t** hus depends in part - often in large part - upon its physica **l** ocation. Infrastructure investment is thus invariably locationor site-specific.

Infrastructure investment is also jurisdiction-specific. In principle, there are many alternative ways in which ocal infrastructure may be provided (Box 1). Is the project designed, financed, regulated, operated and/or maintained by the national government? A regional government? A local government? A state enterprise or other agency reporting to any of these governments? Some sort of public-private interaction (e.g.BOI?<sup>2</sup> How does the government or agency responsible for these different aspects of the investment finmce its responsibilities? To whom is it accountable, in what sense, and how is this accountability exercised?

Seo, notably, Aschauer (1989), and, for an application to developing countries, World Bank (1993). **As a** aide point, it appears that moat such studies assume that infrastructure is provided to the private sector free of cose this may be an ccurate depiction of reality, but it is not a particularly desirable state of affairs.

2 There am many possible forms of public-private interction in the provision of infrastructur: for a recent discussion in the context of a developed country, see Bird and Slack (1993), chap. 7, and also Kitchen (1993).
<!-- Start of picture text --> . . .................... E.<br>E S ~~~~~~~~~~~~~~~~~~~~~<br>... ~ ~~ ~ ....... :<br>u : a@. . . .~~~~~~......<br>The~ ~ tolosn ~ ~ ~~~~~~c sc answers stee a fet somtes dreamatically buothth<br>gU S"iN~~~~~~~~... . . .<br>; s , N ......- . ....~~~~~~~ ~~~... ;.s...<br>: ss egioaa :,:::::: ..........<br>"''''' answeirssoustionsnsucf ahf e'as s.a<br><!-- End of picture text -->
_6_ net social benefit of a particular investment and the distribution of its benefits a±id costs. Which public infrastructure r .cjects are built, wher^ they are built, when they are built, and how they are operated, mnaij.tained, and utilized invariably depends largely upon the way in which the various public sector institutions involved in the process are organized and financet (Bo0x 2).

<!-- Start of picture text --> lx g E Euelle harutEtr m* e='. fo W.hom?,...,',,,'gBm.= u=r= inatcu prjetsIst6ri,Xn 0a<br>g E E~ a|su lag ._ i huh, wn tEibo .~Iu4omalta<br>F&df iW vt ~ o b b poumalz4~cvea( 'Mntd3vc<br>0... .<br>_g.~~p* W=-~ct.<br>*u Thatlothi iupstreis obvi~ousct to e anone fam3iiar wit the sad ~r lfiitany of las taed~<br>( lprdutvel p.uinfrsrcua in all to maycu __ofren traes-ortad htht leadnowhere<br>uninsed hosptal an sumch oolh price w s undterrnain.yataiedw andodtberioaredatin wate ansde<br>sewerage sytems. ngsm counttries ather psamet messarag e Onis cionvye Pbojenct.h(i oth<br>aloaive andQr distributive terams)- pulcrinvstedwntoae expentive withn pubilictiesfrvihe fea-wh<br><!-- End of picture text -->
7 as a rule do not pay for them - waile at the same time the many pay a large share of their small incomes for less adequate (ad generally unsubsidized) versions of the same service.<sup>3</sup> To mention only two common exampls found in many developing countries: "free, university education (albeit usually in undermaintaLvied buildings) for the few and not even primary schooling for the rest; highly-srbsidized (but unreliable) supplies of piped-water and electricity foi the affluent suburbe v' ,AJ the poor pay ten times as much for even worse service al the other end of town, often1<sup>provided through the. so-called</sup> 'informal' sector.

Such common outcomes in many countries reflect neither inevitable fate ("the poor are always with us") nor dire necessity but rather the structure of institutional incentives to which decision-makers at all levels are reacting. Inappropite incentives as codified in the orgnizational and financial structure of the public sector, **largely** explain why the **"wrong"** project seems so often to be built in the 'wrong" place (often at the 'wrong' time), soon to deterio-u;e owing to lack of adequate upkeep, while at the same time other projects that people are both wiling and able to pay for do not get built - or at least not bv the "official' public sector (Box 3).

.... **.e** .a **e** v .t a et d i c e a e a o i: e **ahio ved *** Iwpnawg _sm oia4_ s f uoe and getin by sy-ncm ommunity in aki ustng" mo xnov ... atructde facilitdes.: ?v finaced e g by sye : f .........~ ~ ~~~~~~~. . .... : .....

How and to s/hat exetent the public sector is decentrasezed, and what exactly is meant by hdecentralization,l are thus critical factors detenrining the productivity of infhastructure investhrent in any country. What infrmastucture gets built, where, wen, to what 'For various examples, see the papers in Bird and Horton (1989).
8 specifications, and how it Is maintained and utilized, depends largely upon who is responsible for these decisions, and what "responsibility means in this context. The next two sections briefly introduce some of the many dimensions of decentrlization: what is it (many things), why do so many people advomate it(for many different and often incompadble reasons), and what are its imrlications for infrastructure (it depends)? Tae fourth sectioa of the paper bnefly sketches a framework for considenng infrastructure investments in a decentralized setting and, as summarzed in a brief concluding section, suggests some ~,uiding principles for dealing with the many and divere issues that may arise in practice. Throughout, the discussion in the body of the paper is .ipported by a number of "boxes that develop a few aspects of the argumnent in more detail and illustrate some of the points made in the text by brief case studies.

# The Many Faces of Decentralization

'Decentralization' is a slippery term. One way to pin its mear;ng down is to distinguish three varieties of decentralization as measured by the degree of independent decision-making exercised at the local leve. peco,en means the dispersion of responsibilities within a central governmen **t** o regional branch offices: while clzarly relevant with respect to some infrastructural investments, this variety of decentralization is not fmrther discussed here. In contrast, delem tin refers to a situation in which local governments act as agents for the central government, executing certain functions on its behalf, while devoluton refers to a situation in which not only implementation bnt also the authority to decide what is done is in the hands of local governments. How one views the effects of decentralization on infrastructurm depends in part upon whether one is thinng of delegation or devolution. Unless exactly the same people face cxactly the same incentives in both situations - which iS hardly possible - the outcomes of the two varieties of decentralization are likely to differ shar' y.

# The Benefits and Costs of Decentalization

How one evaluates such differing outcomes depends both upon the nature of the investment in question and upon whether one focuses on the intnnsic or the instrumental aspects of dcxentralization. The literature is replete with passages praising the virtues of decentralization.4 Not only will it produce more efficient and equitable service delivery through making better use of local knowledge, but it will also lead to greater participation and democracy resulting in more popular consent to government and hence improved political stability. When to these good qualities are added such further ascribed virtues as increased resource mobilization and reduced strain on central finances, greater accountability, and more responsive and responsible govemment in general, it is not surprising thiat some have seen decentalization in and of itself to be intrinsically valuable.

' The particular list that follows is based on the discussion in four reent intems. Bank documz a (on Aex.zo, Nigeria, Indonesia, and Venezuela, respectively) but it could be replicated many times from many sources.
9 Whatever the precise outcomes that may emerge from a decentralized (in the sense of devolved) system of decision-making, from one pentpective such outcomes must oi presumed to be satisfactory simply because the process itself :s desirable. Loc people may maLe "wrong decisions from the perspective of the central government or of an outside observer, but if gh= make them, the decisions rtust, by definition, be assumed to be right' for them. From this perspective, decentaization is intrin2ically good because it institutionalizes the participation of those affected by local decisions, and the results of this good process must themselves be good.

Under certain coneitions, this argument is persuasive. The conditions for successful decentralizaUon, however, are seldom sufficiently emphasized. In their absence decentraliation may not only fail to improve local service delivery, but it may carry risks up to the level of national destabiIiza.¢,on.' If more expenditure responsibilitia than revenue resources are decentralized, service levels will liklly fall; if more revenues than expenditures are decentralized, local revenue mobilization will likely decline; even if both sides of the budget are decentalizee' in a balanced fashion, local governments may not have adequate admrn!istative or technical capacity to carry out their new functions in a satisfactory fashion. These problems may be particularly marked with respect to infrastructure owing to the 'large ticket nature of many projects and the degree of technical competence required to carry them out (Box 4).

Three conditions that are particularly important; for successful decentralization in this context are:

[1] that the local decision process is fully democratic in the sense that the costs and benefits of decisions are transparent and that everyone affected has an equal opportunity to influence the decision;' (2] that the costs of local de.sions are fiuly borne by those who make the decisions, i.e., there is no **'tax** exporting' and no funding at the margin from trnsfers from other levels of government; and

[3] that the benefits (like the costs) do not 'spiIl over' jurisdictional boundaies.

**A** s experience in a number of ILa Ameica coun;Aes has sugesteod, this risk is greatest wh revenues are decentrlized without adeipate steps to enure that local revenue mobilization is maintainod and thst local authorities are cpable of carzring out the correponding expeaditr responsibilities. Argentina in the 1980. offers perhaps the clearest exam;ple, but others may be found in e.g. the Philippines and in many of the transitional economies of eastern and central Europe (see Bird and Wallich, 1993).

' Given the inevitable imperfection of democrtic institudons, and the ability of the rich and powerful to come out on top in most systems, this is obviously a counsel of perfection.
10 OX :4. Deiit iai Tnftastrwctury 'no Problein o Tfhnical C b :iti : I 97CDOlo bia devolvedite prm r u osbby(rtepoii of d **nking** water sadwziatia aceuto ocl gvormena. h. wo ~tOnalOerMOw agemcin previ=wl i.rl"4d ***ith** h. vost nn 10 wlllcaJrvdn gvenens n to imnaf towns sadonefo naalaiss wee isbndd ad cedby dvsor Minsty,of Public; Worki~~E(th Whentb the c o awestr .detting tisi **is end** rinec whtadrd view d i nt itrinsically uWhatnen (thee. ar ndid **UMe A** not affect the.35 aui as Even . whal ner serage ce. .. of ther.se co anodthe 237 * , ioesiii . ',' .l.. g.ov.n. o ..,..... **.......... a..leisths** rocm...e...rt ts fr.xapV p a ti on as attb. whole).7 **t derthae asen, however,** thwe efc Thesmet in different ways, n **e** eds were **and** _to_ different degrees~~~~~................ nalidee, ~-~ instances,certain **In** requrements for taining or adice wo.e.co.tacted..u.... im lementation threspo sibltes olca ois _acu_ aeintueta es poie that~~~~~~~~ netveaiglc3aleisionmaer th **are)Qh pro** perl~ **y sitrua actued,** that s, stuctret prdc the deeare bye theae diferent government (inisalactla lceelrof ee endnth ajnd these conditionsawe seagifed facilutieoi diserentspare, owhethetry vioe wed iosrumenotayer Howuu'e this ob doney hpasa boe disur c oa etenively velstewhe prjee.g. Br 1 intrinsically. When they are not, it may not be. Even when one or more of these conditions does not hold, the delegatin of implementation responsibilities to local bodies may still make instrumental sense provided that the incentives facing local decision-makers are properly structured, that is, structured to produce the resl!lts desired by the central govemnment (in its capacity as representing th-e populatioin as a whole).' In the absence of the right incentive structure, however, the effects

> 7 How ths may be done has been discussed extensively eLsewhere e.g. Bird (1993).
11 of either delegadon or **devulution** on the efficiency and equity of resource allocadon may **be** much less beneficial than often alleged (Box **_5)._** ~~~~~~~~. **. ..................** ....................... ... _,5._ ..... s .e .W., .ia .:..:::.::.o ,ol **vee..** {.e.a; ... ,.:ez Oni.: a: **:** .s.out th ay w y a **poor..** ,ult te .... ss., **of. :o:a** effec _.govrnmt_ **e** adwinis:::a:i: pulc e .n **:::deeop** Aoss* **i** ble ie :o:i: KW::l _thit n in_ ot.u **800 rinaoXlIra fo** ucj: onsn oacoadeul.etnt m a cousntryn : .. **..** . : v.s : : : **use b. :.** :: **f** - disc...... : **s** : :' ,ss.e: .ss; **,::** ... **:.....:** : :: s :, : **s:s:** s :. , **6efo** yan v **o pt m h nits o d** **_b4_ s os p i . w p a diefcAm o a poss ib** _ho_ **ibandtctvo** _,:_ wr - ed peopl toe a **aaeei:::n lobt** tgovernt **sen an..** goi'Knmints.Oue **_nbiwer toW_ 6hs** bviul t **nabem** lte **toe poa~ tholtnes ton** kei ss :: :' "ssk **''UIeffls gm Aia:"°** 'tZ s. n:d.:s' s:' e,.''= .. : _:l::::s:oMA:_ The .endrs :. ::: _o_ **tlsti** s~~~~~~~~~~~~~Uo' perbap **trho o:adt** o Ns .. ~O o **..** . **.** . n e: .. **ets** w t ..... **_.1o_** 1dyAla te d **_m_** of o **e..** :: **verm** _t_ **izatzve::** T thaese countries, local citizens look: to the national govrnement to fixpotholes on thair stree se~~~:C ss ;S **Ak SP.M** .1: **.ec** 1]p: **9V> adtys,:** _t_ do .o th G ofve ounties u **aS** stnwmm re: **was.~ if there** of tinppor ~ ariabdle?i ~ ~ ~ ~ ~ sae sliu **fohr.** For ezamp1e;:a number ofi4~c **reDvenues a^s well** asre8ponaIibiity frimortaint pub1i~ service functions, but without stng up an:: who hey izi,whattw **he** ypay, e th buss _t~_ etc~ **ad eAve nto redomou of ateioran** lsloa ::::alntaliimakimm anrsom insevicesi hedt o heastreh. of pb :: d Whehe ::::s:over- or::imde-nrollod, local governmet inall :too: **W le tea eomor~** ilo ***Duppst** mdWricnro isIeginngt _aY_ ee conties receive **il nfobr)** pvea ~n t~ aa jenmes in nume o way In. ome m n=s' for exampe th: a mount of natina fundin deeved depeds pon _the_ aizof:lhe local buget deficit: a sperversei: no cs btter r no Fund foprton an wnteac _thscmo_ ytmi evs eas i pay localtes not to mantin ansioa point, To **iehs** b.esaen impdiciyralssumed thav stin fclties (whc tey woud have :to do out of tei o: fud)t tihesrcueo local governmmesim n nationa :: n ordeir t:o strenten escr appaent ned for:new ones (which th eoa government will pay for).:-i::: adeliyquratle: nthatnto whocr doeswhae tatd _tnder_ what rulds, may bein proerly sdeterined bay Source World Bankc (1993.), bird and Wallch (1993) ::: ::

# Government Structure: Constraint or Vaniable?

To this point, it has been ixnpliciily assumed that the structure of local government is a policy variable: that who does what, and under what rules, may be freely determined by central policy-makers. In some instances, however, the structure of public sector decision-
12 maldng is not a variable but a gij=. Perhaps the most important such case arises in federal states, in which two levels of government (national and state) have specific and independent powers assigned by a constitution which is not easy to change. Even apart from formal federations, however, it is often difficult to alter governmental structures quickly, particularly when, as is usually the case, the existing structure reflects historically-determined patterns of power-sharing.' In such circumstances, the existing degree and pattern of decentralization in effect becomes part of the environment or context within which infrastructure decisions must be made. When, as is often the case, some of the incentives resulting from the prevailing form of decentralization are perverse, careful attention has to be paid to the extent to which those incentives may be altered at the margin without undertaling major (difficult, costly, tmeconsuming) constitutional (or, perhaps better in formally unitary states, quasiconstitutional') reforms. Even within a given constitutional structure, however - even one with many "wrong" signals being given **(Box** **_5)_** - there may often be a surprising amount of local discretion in both policy design and policy delivery, for good or for ill (Box 6).

Decentralizing infrastructure decisions in an efficient and effective manner may thus require very differenat strategies in different circumstances depending both upon why this approach is being taken - for intrinsic (because it is good) or instrumental (because it produces good results) reasons - and upon the perceived rigidity (or flexibility, as the case may be) of the formal government structure.

Many other factors must also be taken into account in assessing the likely effects of a particular form of decentralization. Each type of infrastructure investment, for instance, has its own specific characteristics (economies of scale, t&e identfiability and spatial concentration of beneficiaries, etc.) that may affect the desirable degree and nature of - decentralization at each stage of the process design, finance, construction, operation, maintenance, and utlization. Moreover, since, as was emphaized earlier, infrastructure investment is inevitably location-specifc, the local environment may differ in many relevant ways: rural vs. urban; large metropolitan vs. small city; the relative importance of formal and informal markets; historical and political background; and so on. The potential uses, effects, and limitations of different varieties of decentralization inevimably differ in response to these, and other, factors. It is thus singularly difficult to generalize on this subject, even within a single country (Box 7), let alone across countries.

I For a recent discussion of the importance of such factors, see e.g. Bird (1993a).
13

# 4O .LclPlce a Make **a** Differenc

ggi:s:: : . . - .. - . - >i ...... ,,...._ .... t.e, **By.** s.iwid hn th neUe .. .p.., t.e wd . _&Brn_ loal gvrm.t polcies iocul . ,.ht can ru W:'::~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. _ua_ ~oghedie .a ,eal ... .in. , .. **.** ... (e Box .. , .ecet ;.. ..., ........r:...." **5),** ... _mimetD rU_ o _6f of_ theia ., .... **.** _e_ ,. Sv _reflet or_ a -. .. S **.** ..y **...** _fee_ .. m .f thio and Des-GItan1<sup>, 192'h</sup> X, .ith aim= a. =- . Ss~ ~ izoa gvseram Obu~i locl gvemin inst 1ea ,,, e.;sX do,.,,m,u,,h the utes td4 etnnt outlgd wotn ao n dow. Or it'S < sy becauise S

# The wPolycentric' Aipoach

Matters may often be even more complex than this because the optimal strategy in many cases may not be **wdecentralizationu** in the sense of establishing a two- or three-level hierarchy of general-purpose governments, but ratlher a noncentda or "polycentricw institutional arrangement in which there is no single, ultimate center of authority but rather a number of independent bodies each excercising authority circumscribed by rules (as opposed to superior authority).' The private market alone is unlikely to provide adequate infrastructure in part because the phenomenon of *free-ridingw makes it impossible to realize economies of scale. Centralized provision may overcome these problems but it also often results in misplaced and misspecified investments owing to its inability to take adequately ' This concept is most fully developed in Ostrom, Schroeder, and Wynne (1993), chapter 9.
14 <!-- Start of picture text --> ... BaOX:7,Accommodat Local D iveity . .... .. ....<br>'Local:: goveriamen'15te .~~~~~~~~~~~VA . that co n Wide r:n:gof reali wimost Cities:<br>of 0 mllon eope,villages .Witlh 200bihabftantS, Auran esl ouae and rba ara s,sa<br>: , ~~~~~~~~~~~~~~~~~~...... . .. .. PA ...<br>.ocalities mrs rich, 'ome are poor somebavo strocj local comimmity spiit, s Ome v n Some<br>azu m by weflIntmb ioned wel-ftrane people thrb ncompetnt n orptofcas<br>.,., ~ ~ . ~ ::1 :.:s:.::.::.:.::-: S,-7 S,.S: ::::.. ::,::: .,..:::..,.. .. .,... .,.. ,<br>..... .. .%.'Sg :.govaenment v -:. erni ,s5; Sz>Gu::lu .: ocu n .. , .. S v ............. 1ffi~~~~~~...... t i , ....... t, . S<br>(Box 4)s,up and including accommodating ~'home-brewed informal-sectoz oluion.s t i .. ..<br>'<br>'S'e G ' . ,dcto and ,.lt ar d,atmna ,epnilte 'n Coom, altoug ' .s of .t,h::'e@m',<br>policy in: teru iof building roads, schools, etc. InE somc eorteX oilprdcn regons the tat oil.<br>''''" ' o* G,pniblt ~ G.o:': o ,.:.:;::':::: :n man, :s i ics as som of th.os poics<br>........ 6e * w2S ' 3.. offis of w :~. Gl ' G':... . . : .. ... . ..... . ........... : :::.a . ........ ,,,, e ''. . .<br>* =. = of ipl e l G, :: .: . " ' . :: ........................................... '::,.:*' ...... ...... .<br>, ., ,. , .... ..................... es~~~~~~~~~~~~~~~~~~~~~~~~~~~~.. G, ... .. .. :::f:-w<br>* ,~~~~~~~~~.i: gso.:.,: ..... .. ...... :*::j.., ................ .G .:::::','<br>..... z. o ' .E ........ ~~~~~~~~~~~~~~~~~~.......... ..... .. .. .. , .,_X0 . ,, .. .. .<br><!-- End of picture text -->

**into account place-specific information.d** Decentc **alized provision intended to overcome** these problems in turn has seldom succeeded and has given rise to its own problems - corruption, mismanagement, rent-seeldng, and so on. Indeed, there are probably as many papers in the literature decrying the limitations of fiscal and administrative decentralization as

_"I_ See Box 2. This argument assumes that it is more economical (requires lower tansactions costs) to aggregate information on local conditions and preferences **at** local than at central levels of government. This proposition may be correct, although it is (so _far s_ I low) unteste d, but it should be noted that it implies that ch informatio could be gathered **at** the center if sufficient effort was made to do so. Moreover, if the relative costs of acquiring information at different scales change over time - as seems likely - then the comparative advantage of carrying out different activities at different levels of government will also change (as emphasized by e.g. Breton, 1989).
15 a solution to the problems of developing countries as there are papers propounding its virtues.'<sup>1</sup> In contrast to this linear view of the possibilities - private, decentralized public, or centralized public - what may really be ideal might be, in effect, a different govemment' for every relevant public', that is, for every group affected by a common problem. In some instances, the best solution may be to leave the problem to the market; in others, to form some sort of 'club', or some form of joint public-private organization; in still others to create a single-purpose jurisdiction, or to form an association of different general-purpose jurisdictions (Box 1).

Of course, the more jurisdictions there are, the higher the tansactions costs will be and, all too often, the more obscure the lines of accountability. Single-purpose jurisdictions (such as water districts and school boards), for example, may be appealing on efficiency grounds in terms of providing the specific service with which they are concerned. But at the same time, they may undesirably weaken general-purpose local governments both in terms of competition for resources and reduced political accountability and hence hamper the efficient provision of other public services.1<sup>2</sup> When this rich palette of institutional possibilities is applied to the diverse settings already mentioned, the optimal results, although in theory presumably limited only by one's imagination, in practice will depend primarily upon three factors: [1] the importance attached to various criteria (minimizing resource costs, economic growth, poverty alleviation, participation, etc.);

[2] the nature of the infrastructure investment (economies of scale, span of benefit, etc.); and

[3] the political, economic, and institutional environment of the country or region in question.

It is obviously not possible in a short paper to consider all of the possibly relevant combinations of these factors, so most of the following discussion will assume (1) that the major concern is to promote economic growth (with some attention, however, to poverty alleviation and participation), and (2) that there are two classes of investment (small or local " See, for example, the introductory overview in United Nations (1991).

12 Kitchen (1993), for example, in a rocent examination of Canadian experience with special-purpose districts concludes that (1) they make govemment more difficult for citzcns to understand; (2) they reduce the degree of control citizens have over government; (3) they reduce accountability and hence, probably, the overall efficiency of resource allocation in the public sector; and (4) they appropriate significant proportions of revenue that would otherwise accrue to local governments.
16 and large, as defined below). In addition, the discussion could easily be extended to accommodate two types of countries (federal and unitary) and two types of regions (urban and rural), but this is not really essential: the federal/unitary distinction has already been noted, and the urban/rural distinction may to some extent be subsumed under the small/large distinction. ITis simple taxonomy is more than complex enough for this preliminary look at some of the implications of decentralization for infrastructural investment.

# Inrastructure For Whom?

The answer to the question in the title of this section may seem obvious: for the 'people.' The problem, however, is that there are often two distinct and potentially relevant groups of people - those who benefit and those who pay. Only when the two completely coincide is the answer obvious. At one extreme, those investments that benefit all national residents equally - that are truly Opublic **goods** - and are paid for out of national taxes levied by a democratically-elected governmen **t** hat is fully accountable for its actions should clearly be provided by the national government." At the other extreme, when the public goods aspects of the provision (nonexcludabllity) and financing (user charges) of infrastructare are small, when there is little or no redistributional concern, and when the spatial clusteing of beneficiaries is marked, the investment should be provided by the most efficient (least-cost) form of organization that can aggregate local preferences and collect local contributions - a voluntary club, a cooperative or non-governmental agency, a special district, a local or regional governrment, or some combination of the preceding, as the case may be (Box 1).

Unfortunately for analytical simplicity, most infrastructure does not fall cleanly into either of these extreme categories. Distributing water to residences and businesses may be a purely local concern, but supplying the water to the distribution system is, except in small rural communities, almost always a matter of regional concern. Similarly, maintaining the airways (air traffic control, etc.) may be a national problem, but regional and local interests are greatly conceined with the location and characteristics of airports. Even when an infrastructure activity appears to be obviously local - for example, the provision of sewerage facilities - there may be overriding concerns (e.g. public health) that in principle require higher-level governments to intervene in a regulatory or supervisory fashion.

For these reasons, the only possible answer to the question posed in the title of this section is: it depends. It depends on what infrastructure, on why it is being provided (at whose behest), on how it is being paid for, and, in some instances, on where it is located (where in the watershed or air basin the facility is located, for example).

" Possible examples might be **a** national telecommunication **s** atellite or the maintence of the airways.
17

# How to Make Decentralization Work

To the extent local people decide to carry out some activity through an organiizational structure that they form or that is under their control, _annd_ they bear the fiull costs of their decision, they should be free, even encouraged, to do so. Of course, there may remain many potential problems even with such small groups e.g. enforcing accountability, preventing shirkcing, and so on (Box 8). But on the whole it is probably not misleading to say that the more decentralized the decision structure in such instances, the better the **-** infrastructure should be from the only point of view that matters namely, that of the local beneficiaries (and payors).

> W_~~~~ . .. ... " - ........-....... ,~~~~~~~~~~~~~~~. c. EX.t E.. E 4.44 **_XOm3g_** te aomah Vnfe~snae 3J >E '! J** 5* __ aD *.r F. 3: .. . .. . 32 =3ea **_MDiNg_** oi aboe (Bo 5) ut lso th proidm. E3 adqzt inomtint local.anut 33X3 .- yCi ;2X W>3 3_wa N?;;'** lg ee c~~~~~~~~~lotb deiDitio mus =e stitrdIl.iirhe an toInrouo. -h Eoid~ i_ o ~4~o ot 4 Sl~~~~~trpnvmit foma R,oven ta ogn.' ..... ::..4..::..:U **_73#,]WL3170_ M~01~Q** pi7d.UDs ,i incasls and sgs infor;a4io Is d avilbe § ofte ilag nudnSlU what may e miuin e lainy a:tousI n.. the:: B:invilg g.a s|ded iui; toinlil did= Teugi hneb~m hr a **_owf_** R R.t .. ~ ~ :::.:j :.o,::~ ' :,:::: jo **:** , ::i ~ : :::::S: **:** .::::.;,.~ **::** ':e:: : :: :.:a g e wometimav tuhe doer taiation hft~vlagescho **_bhee_** dcnsidrdan impossi ublc ha depamnd waoor

countries owing to the lack of experience at local levels and the difficulty of figuring out who the likely beneficiaries of projects are going to be, let alone making them pay for what they get. In fact, however, in many countries it appears that even the poorest people opeating informally, within the severely limited conditions open to them, can sometimes manage to provide the local public services that they want and are willing to pay for but that they cannot obtain from the established (and usually much too centralized) provision system (Box
18 3)."4 Experience thus suggests that at least in some cases the obstacles can be overcome, at least with respect to small-scale activities.'5 What is needed to get the right infrastructure for the right people in these circumstances, whether they are located in remote rumral areas or metropolitan slums, i- essentially to provide mechanisms by which their wishes can becomc reality. Three steps seem essential in this regard:

[1] to ensure that fiscal, financial and political accountability is both transparent and enforced (Box 8);"6

[2] to provide a mechanism (e.g. a uousted court system) for resolving any disputes that may arise within the local service unit (or, conceivably, when there are boundary problems, between units);<sup>17</sup> and

[3] to provide adequate technical support (e.g. access to engineering and project design and administration skills) to enable small units to carry out projects efficiently." None of these tasks is easy, and, as already suggested, they become even more difficult when there are significant benefit or cost spillovers or when the redistributional 1" Perhaps the most detailed account of this process at work is de Soto (1989); **see** also Jekin (1988) and Ostrom, Schroeder and Wynne (1993).

_1_ Of course, small-scale activities may add up to be big ones: Jenkins (1988, p.20), for example, reports that small 'informal' suppliers provide 93 percent of urban mass transit facilities in Lima. "I For a more extensive discussion of accountability in generl, se Paul (1991) and on fiscal accountability, see Bird (1993). See also the interesting discussion of the need to develop forml evaluation u a _mean_ of accountability in Wiesner (1993). Although Wienr (1993) appear in part to see evaluation as an alternative to decentralization as a way of improving public sector efficiency, I would soe it more as a necessary complement (Box 14). Effective decentralization depends upon improved accountability, and formal reporting and evaluation systems constitute essential components of any workable accountability system - whether to users, to local taxpayers, or to the central govemment, depending upon the source of financing. In Wiesncr's words (1993, p. 16) **'the** nature and source of financing is the crucial detemina of efficiency' but, a he also emphaizes (p.18), a system of independent and well-publicized assssment is required not just for accountability but also, often more importantly, to help establish a 'public' to whom to be accountable.

1<sup>7</sup> A ll too often, a well-founded lack of **tuSt** in formal political (and judicial) institutions is one reason why community 'slf-help' organization have developed to provide local public services, including infrstur: for examples, see de Soto (1989) and Jenkins (1988). " Note that ther is of course no presumption that small local agencies will themselves actually e.g. design water systems; the point is rather that they must have access to specialized and knowledgable private (or public) agencies that can do so for them (Box 4). In this connection, it is of course especially important to keep the process as open and accountable as possible (see Wiesner (1993) and sources cited there).
19 aspects of infrastructural investment are important. Again, however, the principles of good system design are relatively obvious, and more or less identical to those in the **'smallW** local infrastructure ctse just discussed. B;sically, the idea is that while local residents should again finance - through user clarge- (Box 9) or locally-borne taxes - the costs of designing, building, operating, and maftitaining facili .es tW the extert that they receive the benefits, regional or national governments (as the cse may be) should assume the balance of the cost - that is, 'their share' of the benefits spilling over. Locally, taxes, like transfers from the central government, are often earmarked for investment. As Box 10 notes, however, this common practice is usually not a good idea.

|v.sz;<br>i<br>.VYofbendMt..aaion.=In Lat<br>T ,<br>riL' :for example,atret mroveet,ws<br>suply .and C<br>-W<br>:S S<br>116,2<br>'S<br>*<br>Si.......s<br>s,<br>o ws. i<br>:: :: :2: .:.2 <br>>v::d:SmCI<br>have boeefinancnd ys<br>!tzd~<br>ii<br>'1aui~<br>Inwbc|
|---|
|<br> ... .<br>.<br><br>mstnci. Stes<br>n.:..a<br>j<br>e:: ::a:**ben**mot ue...<br>..<br>ttt<br>c..<br>t.<br>:..<br>soc<br>**si creu**plDanninanfecutin<br>o project:s, aticpto<br>of bee:. ads in othplanian|
|:.miilar lessons have emergedbornexperiece with anlternatveapprac<br>clled '.3and reajstinen<br>in_Wos_-- :::ichlrg<br>land: pesC**a**consodad<br>an deeodb<br>thll S"'*t "'<br>|
|<br> <br>p<br>eoa gvr:: m.:>c:::::.:d<br>the. nS<br>; zprofthe<br>proper sreunedto the oinalmenini <br>.**.**<br>**.**<br>. .**:**-<br>-|
|<br> g proportontothir ownhrsipwlle te blanlce::.<br><br><br>,**.** **..**....<br>. .<br>_:::_<br>_xsoldluythegovernmentat minakt pnce6 mnorder_**_to_**_:recoup deveopmetcosts.:Again carefull::._<br>'~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~<br>"......<br>.. .. s.<br>' *'|
|::B<br>.........c.<br>**esetexperences:dmostteatlocal**<br>goe<br>Cmet<br>me<br>r<br>a<br>**devop**ur:an<br>asrucr inect b<br>ith l dlRl<br> <br> <br>|
|......<br>....<br>......<br>.. . y<br>payge oe**o**eveopr.ecenty<br>azuother<br>way inwc<br>eficianri<br>o-alled 'exactions, wlot.evies', '.evelopnt:uarpa,:and.:mla.. . ..ee...ndrwhch<br>e<br>p<br>|
|<br> <br>.<br>i p<br>.......**..**...............<br>costs w<br>: ..<br>develomn zwilimposeon.o<br>due urba inratrutue<br>:For example, tf l00 newresdences areto be:...<br>e..<br>rced, and...everage.<br>.ost<br>of add.ng th..mto.eu<br>_.wterand_<br>gesystem<br>u::$10,<br>the.<br>~~~~~~~~~~~~~~~~~~~~~~~~.<br>_; S_<br>_........:i_<br>_uz_<br>_::..._**_......_**_..................._<br>_.._<br>.. ~~~~~~~~Otmmd<br>_o:uvstiaf_<br>**the§**<br>use<br>_.u:by._<br>finacify-ressed<br>_rba_<br>govrnmnt_.to:_acommodate_poplatidon:expansio without:.:_|
|<br><br>:5B y .- ......<br>~~~~~.........**..**..<br>: :<br>Of COU:alfioal<br>$sytems**of sps**<br>ifsrt<br>**devlopuuca opesuccessful**<br>onlymntheformalsector..::Tothiecxet development takec nTaceprmailitheinformasector-::<br>.. uattersettlemetsan<br>.the like-.les.sdfomaystems most 'oeuse_ifac_<br>thre<br>_to beanybeneficiary.:_|
|_Sowe WordBak(1988);_Slc<br>u_Bir_(1991)._.:_|
20 ... .X ,. .a9~In~ .,od , r Dad?............... ~ o:th. moss puvuiv. fhhbRim of local **_jV.~minL_** finance in dAVIIOFUm............t.e g . p .. .- . - ... i.w..f..!.oEX ... . p:.s;1uzc. :: : x:1 ::^:::: hiurk:: :n ::d. :zmp. **:** a ... eat. .:a .. .ta.. o,.§: o:.:: at t **tax Is a.~upb4 f1r** - **_MaV & -_** urban locaI I!D gsv.muu. **_MIW*U_** and o.of '"' **_#S._** thia porcioX ~:., _in_ turn mu&sd - .i. ~ **_A_** imilg........... , ,2 **spWmg** ~ ~u already difficult: pmbl.rn o3fmhing S i **...** . n.. E XW .t iS B^<SB;>iz ,~~~~~~~~~~~~~~~~~~~~~ **.** Bi:XfiSB .....

the ostlsplittimayb achieved inuvarious wa thr appd ropiataly dlesigead servic chre _tou_ andotn-residen beneicmarieghs, itndividuaUy oar poretisl, though matchinsgne grants sBox11) thrug borrowing, phuuossibl axto slubsiied addties (Bo 1)ors thoughyi dlbec gouvemmmn f eienttomk tily mbinvestmen and toliquirl _the,_ liokal algov ernmen toe fuptnd §Th le.s,s>salen ditiutoa concern.ss::::>:::suigSsi ts-e more reiac solbeptobnfias -s,< oose ts abi ;s ,ty-s subsequetsnarninglcosts Epneren.Lkuc sugcest, hwev er, aprorstl thes commoneee sp uidtnis danereousince ion thie thbsen,c bae,iacn tteiai~Iad einllvl a nel of pnolermectwion. lo u hsi ?theines scndr tmeinterepde eneisssuein hepsntconetl **o** frca ngan govemmuents drecso a ndooEl tohe apathetall wimothn mspec to operat*iogn ainkmingtevene (Box 1-4XpIe lowsafren disribtoal concm , hemdon~m mtiance stouldnaecpnt lona b fitfas oppoused to 3bliy. governmentnton make the aio nd eionanve stmn and, u toi **l** rqis ecodyisei the loapgvr msent tonfund
21 13). Why should they fund the maintenance of something that all too often they did not want **-** in the first place? especially since, 311 too often, they can count on the central government to come to the rescue agaLn if things get bad enough. Ausa,what is needed isto face all relevant decision-makers with a sufficiently whard budget constraint. Provid .d accountability isagain taunsparent (and there is an accepted dispute resolution mecbaism), if the prices facinlg decision-makers at all levels from the indivridual to the national government are rightw in this sense, the results should beas good as canbheachieved.

<!-- Start of picture text -->
| I . | i1~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.. .<br>~~~~d~tl argn | l |*<br>m -'t i' FS ~~~~ ~~~~~~~.4-,....<br>S ~~lsai d bmyfrte*Ie ,bcbvd.<br>;44 .'4 '.:.... " > .$~4 -.......... ...<br>wa =geyb ihmgbaX .s. s th?<br>Ipmt ais iw coure murvch cainer t~o of state such tictangnrl trermsu thanearl to prescribe<br><!-- End of picture text -->

preisey hatshol bent sudothu in and particular cae o actievtes effwicitent and eqiabclea d resource allocation, let alone **to** work out what is likely to be adminlistratively and politically feasible in the circumstances of a particular investment in a particular country. In federal countries, for instance, the scope for creative institutional design may be much more <!-- Start of picture text --> r<br><!-- End of picture text -->
22 <!-- Start of picture text --> rUOX 12. Loa l o rowi n,<br>: ';, ... . . .. .. :. :. .... * .:.. .::h .,:: v .: .: . .. :.....:.<br>Whu the ..... .. . mifr.tmc prq . oct .... ovr~o otm.imyb both<br>i .S . X .. = K l.. X . M | X,0 ,,.a,'m,,>....~~~~........<br>lala tN xa..s frm.... .. . . y<br>4 R 8 eS ' . 5 : a : xi ,..,.:..8 ,.... ..... ........<br>mu aadmkr , alw n acces yeuc by oc govemmet l ihe loalos bonwmgis<br>'Si S*u :.: .ud1d ms ewfra pptia a.. liev>a aza local<br>= : ',~~~~~...........:.<br>.'S StSsim i > .S w ~~rite ...<br>s . . . . . . . . . . +w::::d:4Swl - iS~~~~..... ..<br>j M j,............~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.... ..<br><!-- End of picture text -->

restlicted with respect to federal-state interaction than at the state-local level, particularly wvhen states rmPre **ont** real difference in valuo and experiences (e.g. there are linguistic difference-). Even with respect to the Esimplem cas of purely local infrastructure, the possibility of building on indigenous infonmal organizations to provide local infrastructure in an efficient and qui.u ble E shimon my be much greater in a traditional rural commueity cnti in a dynamically changing metropolitan area.2o

# **Guidelines for Policy Design.**

Thc essential frmework for policy design with respect to the decentrazed provision of infastructure thus basically amounts to little more than the familar econor<sup>ic dictum "Get</sup> the Pr,ices RighLt" In terms perhaps more familiar in the public sector,<sup>this may be</sup> tanslated as 'Impose a Hard Budget Constaaint", i.e. face aU decision-makers<sup>at tlte margin</sup> X It is perhaps not entirely due to the terms of reference of the research project on which<sup>it is based that the</sup> stimatin boomr c by Octrom, Schroeder, and Wynd e (1993) deals solely with nni are ls.
23 :O B=13. The Recurent Cost<sup>Problom.</sup> :. ::.. op:to abn d aitenac of :nrsicw Is tX aassup tha loa ovrmtsw, even whn .:ual tecs ::t involedi th* seecio oreeuino roet,cnadwillo fe : **'" .:, .:l S** E = **S** = Ali tdepir,owee. .. ere are E :: f::E::: In :: L:~j > i **'** . , ' **,** bQ~S~ **found_ Ad tode rbli jua.oa4= o innig I- h** **_rcnetonns_** ,W 0 sr4o)ee , nfatro withothe responibility eae to raising the funds and fepicitg rtaeuir chastitens<sup>sithe mothroa</sup> fil *(ikcemetal)ir cosAtiofted adoe)iin Tehwi **e** lentn secion **sespa forute** inroe itervice.dtilsms sugges ~tios **ese** tohowtea **istia tutionl-dfrned prlojet wth oe** public secor **r p wa o hae** ntutue **god** ahelp achieve. Whis e oaime.tal~nu~f~ti ecrpin asal rjcsd n EEwea,fsaul

**Tove** bergin **pith,ect hiswfli4 clear** thtonbiewilnotfait all, ;hat **iso, thart** pr **ueid whargea** and ashould the dorefrre antyparticula casedeead,t<sup>s upoil n amyrial pofec ploannl t</sup> factors (Bw7nd cann rotepriae stcribed rym ausr.Nonetheroms the<sup>basigpinncnplean</sup> to battem follt e in allI hses **t** c

with the rspoensibiliy of rumarisigtedfuns<sup>anf fcngtelonttunswihsh:fl</sup>
24

# ,1] Ensure to the extent possible that who benefits, pays;

',2] Do so in part by making the lines of accountability (the rules, or incentives) as ransparent as possible; and (3] Proiide some enforcement mechanism to ensure that the system workcs as it should **(Box** 14,.

S . §iE ,tisicm. ; S 21 -X ,ffivffi = ' B g **%2s.** .tu **a** atc = _S._ x ' _ah_ S s~~~~* 4 g a . 4, ; E=l1 oc-al; **=** i S =~.. s= |: ua.*vI 4 (tuuaflj)ieka . EaUc~ **aXuad m** Baidom to wel It It d, ho _ 1 = **N~4** = = S~~~ .S::S::.2 t= = === **,S hive** dectst,a&t. x..l 5 _; s3 BtIOoal4alw*is=e ma 4*Z: l2~1 . . 3gmsbmz Mel$;u1 O4- BxV to ln4nce of clea3i.t loca:x:j:B ::::s::: s ydo cett .oove. capsolt ahae of t:.> dbI Alhugh prciel how these principles may~ be best saZt1*isfie d , e _of_ crourse upon (say

naur numero ynew.en, rvddthey structur governen,andman _of_ oter luocal factoers theonz

> nollowin the brif ommcznnts the strctue ofgoeir met aplcaind clanyoheeoclfatr.h
25

# Purely Lccal Projects

So far as purely local infrastructure projects are concerned, they should clearly be financed to the extent possible on benefit lines, that is, by appropriately-designed user charges where suitable and otherwise by local taxes, where local taxes are understood to be those borne by local residents (the presumed beneficiary group). Pgvided there is a responsible and accountable local political structure (Box 8), the results in terms of both the efficiency and equity aspects of infrastructural decisons should be as economically and politically good as can be hoped for. Only those projects will be built that people are willing to pay for, and when they are built they will be adequately maintained so long as people are willing to pay for it; moreover, if the correct prices are charged, the projects will be efficiently maintained and utilized.?

Of course, this simple picture conceals many potential problems. One concerns the distributional aspect of infrstructure. Lally-&dered demands for distribution may readily be accommodated through the siting of projects, their design, precisely how they are fiaced, etc. - but only to the extent such demands are effectively articulated through the local political structure. If that structure is captured by the better-off, as may often be the case in practice, and if there is a national concern (articulated through the presumably more heterogeneous national political structure) for a more redistributive delivery and/or finaicing system, the national government may attempt to satisfy that concern in a number of ways - e.g. by restricting the extent to which projects can be financed through user charges or by mandating certain service delivery patterns. Unless the national government pays for any excess costs its requirements place on local power-holders, however, the result of such interference will be _tJ_ reduce the efficiency with which the noncentralized public sector decides on and delivers infrastructumal services.

Another concern is how to ensure the transparency and accountability of local political bodies. Local authorities should not, for example, be able to 'export any of the costs of their decisions to persons to whom they are not politically accountable. Their access to taxes on businesses that trade outside their jurisdiction should therefore be restricted whenever possible.' Political and administrative mechanisms for public accountability - e.g. making the books open or setting up watchdog agencies of various sorts - need to be in place (see **Box** 14). Whenever possible, infrastructure projects should proceed only when there is a clear decision by a politically responsible body as to exactly how their construct!on and 1 For further discussion of the choice of local taxes, and of various vareties of user charge., see Bird (1993, pp. 212-14). Such recommendations are of course not uncommon in the literaturr: but what should perhaps be emphaizad is how very sldom they have been followed in practice.

## For examples of the nks stressed in the text, see Brent (1993) and Box 13.

_D Tbis_ common recommendation, like most suggestions for increased transparency, is morm honoured in the breach than the observance: all the incentives for politicians, both local and national, ae to conceal what is going on. Too often, obscurity, not trnsparency, is the key to political success
26 maintenance are to be financed. Where the projects are big enough, this requirement may call, for example, for a spezial voting or other approval procedure.

Finally, anyone contemplating letting small (or even large) subnational agencies make their own investment decisions in the circumstances of most developing countries must also be prepared to invest substantial resources in 'backstopping' such agencies by giving them adequate access to e.g. technical skill in designing, financing, and managing the construction and operation of infrastructure (Box 4). There is no need for such aid to be provided by a specific central ofrregional agency, of course: local bodies can and should be encouraged to contract such assistance privately, to hire it from other, more experienced public sector agencies, or, if it is appropriate, to contract with a central or regional agency experienced in the particular field (Box 7). But they should be to pepare projects in a professional manner, to report on their execution and operation in a transparent fashion (Box 14), and to bear the consequences (political and economic) of any mistakes they make in these respects.

It may of course be easier to enforce some of these requirements when some of the fmancing comes directly from a superior level of government - see below - but in general what seems required for success in this approach to decentralizing local physical infrastructure is to create four pieces of institutional infrastructure:

[1] A local finance law that provides access to local (ngt non-local) revenues in sufficient quantity and that also requires regular and uniform financial reporting both to the local citizens and to independent auditing and evaluation authorities (Box 14);

[2] A political structure that provides for adequate local financial and political accountability;

[3] Adequate institutional infrastructure to support and develop the capacity of localities to operate in the environment sketched above.

[4] Acceptance at the national (and international financial institution) level that what local governments (or other local actors) choose to do with their own funds is their own lookout: there should be no Father' who either knows best or rescues Junior from the consequences of his (or her) own mistakes.

While it is unlikely that _yaY_ country in the world today fully satisfies these conditions, if the general line of argument made here is accepted, it is these matters - building institutional capacity to support and operate responsive and responsible local governments, establishing adequate 'rules of the game<sup>3</sup> for local finances, and ensuring that the desired degrees of local participation in local political institutions and of the political responsibility of those institutions are achieved - that require attention if political, administrative, and fiscal decentralization is to produce better and more sustainable decisions with respect to infrastructure.
27

# 'Su2rLocale Proiects

Even if all of the above conditions are satisfied, when the benefits of infrastructural investment spill over local boundaries, decentralized decision-making can produce the 'right' results in the absence of intervention from above only in very special circumstances. If, for example, only two or three contiguous jurisdictions are involved, particularly if there is some reciprocity of benefit or cost flows, voluntary agreements may approximate to the efficient result (Box 15).Y When more jurisdictions, or less clearcut reciprocal gains, are involved, however, the costs of reaching an acceptable agreement may often to outweigh the benefits from doing so. The traditional solution to this problem is to call in a 'higher level of government. But how can one obtain the benefits of doing so (i.e., taldng extermalities into account) without incurring the costs (i.e., imposing undesired uninformities)? The answer is, broadly, that an optimal result may, at least in principle, be achieved by designing an apprupriate system of national (or regional) matching grants (Box 11) and, within this framework, allowing the non-central authorities to make the decisions.<sup>2</sup> 5 Once again, the first requirement for successfully Carrying out jurisdiction-specific investments with extrajurisdictional spillovers is to ensure that to the extent local benefits are reaped, local beneficiaries pay for them, whether through user charges or current or future local taxes. Applying the same principle to those benefits that spill over, wherever possible users (mdividuals or communities as the case may be) should pay for what they get, baring some overriding distributional reason - to be covered from general national revenues - as to why they should be relieved of this burden. Where this is not possible, or it would not be efficient to do so - for example, because of problems in identifying and collecting from beneficiaries - the 'nonlocal' portion of the project could be financed by matching grants.

To be effective 'incentive-revealing mechanisms' such grants (loans) should be designed and administered in accordance with the following principles:

[1] Recipients should be required to prepare adequate plans with respect to (a) the design of the project; (b) its subsequent operation and maintenance; and (c) its financing (including, where appropriate, pricing policy).

(2] Assuming that the qualified projects eligible exceed the available financing, priorities should be assigned in accordance with the assessment by the financing authority (which is of course responsible to its own taxpayers for the use made of

> **_2 As_** Box 15 uggests, voluntay agreemts may also be used to **s4divide** local governments into relevant benefit aras.

25 Of course, if the central govemment really wants something done (even something with purely local effects) it may either do it itself or, if it makes sense to delegate operational responsibiliy, it may pay the entire cost either directly or through a cost-reimbursement grant.
28 <!-- Start of picture text --> DOX 15. Local OovernmenX ......<br>a s . d o the l g ts ed elo ....,co. c1d<br>. .~~~~~~~~~~~...... .. ..... . .... ,.....s ... ..........<br>neatly~~~h ~ x~ iftx's M' ofteatvdgo sW&~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~..i. oa omet~ n ayuoda ihitdcltbet . .. .. c....<br>t ettt,gjjfi,gottSS...o.,W,.~~~~~~~~~~~~~~~~~~~~~~~~~... .....<br>cononpob. -~otn = biu,u<br>gme deiablt nUb irese =oca ptciaos i .pltiupocs ta zsle.O ci<br>tb zeutaoth onl nbidigppoeta ils ft&ate<br>mue& Noehees whte loa ulcsrie r rvddb opoi omn~ soib<br>obypivat thirW omonay.s of dvlpiet(a uh edfor tuhe cprojet s nssingl :-:ie asei ad o tuhe sclapoaciy h S o aumle,siteeaom ofethehrecipienttheyexayute5000<br>reiats omnt wocatinwnwoea.,tene o uc mboa ciiissebru<br>(or otherad appropin ate agny s ) hec uld tadredynanovdschtchial fo ihrlvl assistance fgvmt Sc<br>ase may beaneedd i developin nes'tm ~ent plansz, arranging fwoinancin lans,~m<br>~3*evpweconsrution,andman in tefclityabone contrnbuctd. It e ay ls<br>miiial.vic.<br>assist t no 'pprlocalsasein their ft=e Isialstructue needs n e ole ty helpn plavye the<br><!-- End of picture text --> Both nee and their money) of the need for the project andof the capacity of the r **apacitbshuld** b taken int ccount:t for uther iscussi **o** f thmdsg **e** cipienofmamin **t** o executew ande aothe) and finance uwfers theeir and aui4 h _itY2_ eer,1992 iadan aWatd) wMg.4asluis1 t3] Information asymmetry works both ways: the central government does not know ~bai to do, the local government does not kcnow hbe to do it. The granting authority (or other appropriate agency) should stand ready to provide such technical assistance as may be needed in developing investment plans, arranging financing plans, managing construction, and maintaining the facility once constructed. It may also assist localities in assessing their future infrastructure needs e.g. by helping survey the condition of existing infrastructure.

> X Both need and capacity should ie takecn into _accounte for further_ disusion _Of the_ design of n2thing (and other) transfers: cec Bird and Wallich (1992).
29 (4] In the absence of shared goals, the granting authority should also monitor and evaluate the progress of projects, requiring progress reports, perhaps making field inspections, and conducting periodic evaluations of outcomes in order to improve its procedures, assist applicants, and better assess their capacity to carry out their promises and the extent to which they are carried out (Box 14). A credible enforcement mechanism is needed to ensure that the contract explicit (or implicit) in a matching grant is carried out.

The similarity of some of these requirements to the sort of institutional support noted earlier to be essential for successful decentralizion of purely local infrastructure investment decions is, of course, not a coincidence.' The costs of monitoring intergovernmental tnsactions is not small and must be explicitly taken into account in designing and implementing decentralization policies.

The principles just staed apply to all intergovernmental financial assistance for specific investment projects. What they do not and cannot indicate is just how much assistance should be provided to whom for what. To make such principles operational in any particular country, a good deal of work would have to be done e.g. to identify as best as possible the proportion of the cost of partcular projects that should be borne by other than local residents. In addition, since both the willingness (price-elasticity) and the ability (income-eJasticity) of different communities to contribute the locally-financed proportion will vary with the nature of the project and the wealth and interests of the community, an 'equalization component may be needed even in a strictly project-oriented matching grant program, thus further complicating the design of such programs.<sup>2</sup> '

# Conclusion

it is difficult to draw very sharp conclusions from the rather diffuse exposition of principles and examples relating infrastructure and decentralization that has been presented in this paper. On the whole, however, the moral of the story this paper tries to tell nay perhaps be summed up in a few short propositions, as follows: z At this point - or sooner - some might say: if all this effort will be needed to make dectralization work, why bother? Why not simply eate a single national agency to, say, provide water or power, saff it with competent technicins, allow it to set its prices properly (providing from budgetary revenues any socially-required shortfall), and let it do the job? Not only will the danger of political interference and technical and financial mismanagement be reduced by this approach, but it is obviously much easier for an **agency** like the World Bank to dtal with a single professional instiution than with lOOs or 1000s of less-qualified local agencies. This line of thought is tempting - but it is also of course precisely tlk: slippeay path of overcentralized, unresponsive decisionmaking from which so many countries are trying, however imperfectly, to redeem themselves by various forms of decentralization. For a detailed evaluation and critique of the 'professional' approach to infmstniture provision and the ensuing ills of 'functional fragmentation,' see Bird (1980), pp. 28-32.

_2_ See Feldstein (1975) and Bird and Wallich (1992).
30

[1] In all countries, some critical infrastructure is provided through a decentralized political structure. Moreover, cunrent trends in many countries make it likely that this will be even more true in the future. It is therefore important to understand the relation between infrastructure and decentralization.

[2] The first thing to be understood about this relation is that decent;alization, however defined, in and of itself has no necessary implications for good or evil so far as infrastructure is concerned: its effects depend upon the incentives facing the various decision-makers in the decentralized structure.

[3] The key to ensuring that these incentives are conducive to 'good decisions with repIect to the design, siting, timing, finance, pricing, opration, maintenance, and utilization of infrastructure is to ensure that to the greatest extent possible those who make the decisions bear the financial (and political) consequences.

[4] Politically, what this means is that political leaders at all levels should be responsive and responsible to their constituents, and that those constituents are fully informed about the consequences of their (and their leaders') decisions. Making politicians bear the consequences of their own mistakes is as close as one can get to a 'hard political budget constraint.'

[5] Economically, what is required is to make it difficult for local residents to shift costs to nonresidents who do not receive benefits and to make local decision-makers fully responsible to their citizens for the use they make of revenues collected from them (through local taxes), to users of infrastructure, local or otherwise for the use made of the revenues they contribute (through user charges of various sorts), and to taxpayers in gener?l for the use made of any transfers (or subsidized loans) they receive.

[6] Administratively, what such a system requires is a clear set of 'framework' laws (on local budgeting, financial reporting, taxation, contracting, dispute settlement, rules to be followed in designing user charges, etc.), as well as adequate institutional support for localities to operate in this environment.

It is of course much easier to lay down such general prescriptions than to satisfy them in the very diverse situations found in the real world. Nonetheless, to the extent that these conditions are not met, the perverse incentives that too often already exist owing to the structure and finance of the public sector in many countries seem all too likely to be exacerbated by the current tendency to decentralize more and more decisions in the public sector. Decentralization - or, perhaps better, the realization that the optimal decision-making structure in the public sector is almost certainly polycentric (non-centralized) in nature - may

> **For further** discussion, **see Ismel** (1987) **and** Wiesner (1993).
31 in principle yield a more efficient and equitable pattern of infrastructure investment and use than the overcentralized and unresponsive public sector found in many developing counties. But it will do so in practice only if it is properly implemented, along the lines sketched here.

I ~ **~** ~ **~** ~ ~ ~ ~ ~ ~ ~ ~