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Jesper Steffensen
This problem was the major reason behind the launching of the fiscal decentralization strategy (FDS) (MoFPED 2002). A comprehensive reform of the entire system of fiscal transfer, started in FY 2003/04, was piloted in 15 local governments and then rolled out in all district and city councils in 2004/05. The FDS is aimed at reducing local government transaction costs and improving allocation efficiency, autonomy, and accountability. Box 3.2 describes the main reforms to the recurrent grant system.
B O X 3 . 2 Fiscal Decentralization Strategy: Recurrent Transfer Scheme The reform under the recurrent transfer scheme includes the following main activities:
Review sector policies to ensure adherence to the overall decentralization
objectives and to enhance local government autonomy and flexibility in the use of grants (2003/04). Review allocation criteria to make them more transparent, poverty sensitive, and needs based and to make them more closely related to sector objectives (review 2003/04, expected implementation from 2005/06, according to interviews with the Local Government Finance Committee). The criteria will make significant changes in the allocation across districts. Reduce the number of grants, to enhance allocative efficiency and local government autonomy. The grants will be grouped in six or seven sectors to establish common modalities, reporting systems, and so forth. Within each grant, budget lines will determine the spending on various items, especially development (if relevant), recurrent nonwage parts, recurrent wage parts, and projects (such as the National Agriculture Advisory Service), but the number of these earmarked areas will be kept to the bare minimum to ensure sufficient flexibility. Create flexibility in the use of the grants. In 2004/05 (2003/04 for the pilot), local governments will be allowed 10 percent flexibility in the nonwage parts of recurrent grants within and across the Poverty Action Fund sectors (health, education, agriculture, roads, and water). Ensure future links between local government performance and the autonomy over and size of the grants. Systems are being elaborated to increase flexibility with improved local government performance, rewarding governments that perform well in terms of generic administration (planning, budgeting, accounting, transparency, and so on) and sanctioning the nonperformers. Over time, these systems are expected to affect the size of the allocation as well, and they already apply for the Local Government Development Program grants. (Box continues on the following page.)
