Decentralization and Infrastructure in the Global Economy

Jonas Frank, Jorge Martinez-Vazquez

• Publisher: Routledge
• Year: 2015
• ISBN:
  9781317438571
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The subnational dimension of infrastructure has emerged as one of the greatest challenges in contemporary public finance policy and management. Ensuring the efficient provision of infrastructure represents a challenge for all countries irrespective of their level of centralization or decentralization. This book proposes an innovative approach for the strengthening of decentralized public investment and infrastructure management.

Decentralization and Infrastructure in the Global Economy: From Gaps to Solutions covers the most important aspects of infrastructure investment in a decentralized setting. It discusses infrastructure gaps and the quality of subnational spending; how functional responsibilities, financing and equalization can be designed; sector-specific arrangements in high expenditure areas, such as health, education and roads; key steps of the public investment cycle and management; and analyses the political economy and corruption challenges that typically accompany decentralized infrastructure projects.

This book challenges some of the well-accepted principles of intergovernmental fiscal relations and will be useful to researchers and practitioners of public finance policy and management.

1 Decentralization and infrastructure

From gaps to solutions

Jonas Frank and Jorge Martínez-Vázquez

Introduction and motivation

The subnational dimension of infrastructure emerges as one of the key dimensions for improved public investment. Whether a country is centralized or decentralized, whether it relies on delegated authorities or autonomous subnational governments, it has to face the question of multi-level coordination and provision of infrastructure. Given the localized nature of most infrastructures, the territorial dimension cannot be obviated. Any country that wishes to improve service delivery, increase competitiveness, as well as foster growth through investment in infrastructure faces the intergovernmental coordination challenge.

The approaches which countries have used to tackle this multi-level challenge vary widely. Some countries execute up to 90 percent of their public investment through subnational level governments, while others not nearly 10 percent. But this share of expenditures is not always a good indicator of the decision-making authority of subnational governments in the selection, prioritization, funding, and execution of infrastructure projects. The several stages and decision-making steps which need to be coordinated across levels typically give rise to a complex web of accountability over final results. Not surprisingly, outcomes have been mixed and vary widely from country to country and from region to region in the same country. The greatest challenge is that inefficiencies in management and execution can be pervasive across the different subnational units ultimately translating into poor service delivery and wasted resources.

The main objective for the collection of original essays in this book is to advance our understanding of the interplay between decentralization and infrastructure. This fundamental issue is approached from multiple perspectives and in an interdisciplinary fashion. The chapters in this book are intended to cover the most important aspects of infrastructure investment in a decentralized setting. They discuss the nature of the infrastructure gaps and the quality of subnational spending; inquire how functional responsibilities, finance, and equalization can be best designed; discuss issues related to infrastructure and service delivery in different areas of the public sector; drill-down to key steps of the public investment cycle and management aspects; and also analyze political economy and corruption challenges. The essays offer academic rigor but also attempt to inform the policy debate with the aim of improving the outcomes of decentralized investment spending. Far from representing a closed set of final recommendations, the chapters highlight diverse views and avenues for improving public investment in decentralized settings, keeping in mind that ultimately what will work needs to be “country and place specific.”

Against this backdrop, three global challenges have motivated this book:

i	Coordination matters: The volatile macro environment which prevails internationally underscores now more than ever the need to coordinate public investment and infrastructure provisions across levels of government. While responses to the 2007/2008 crisis have varied and involved different strategies regarding capital spending, countries will continue to rely on subnational levels of government to provide a substantial part of their infrastructure needs. National growth inherently relies on regional growth, and due to its localized nature, public investment can be a critical ingredient to achieve this goal. However, decisions to spend, and decisions to finance, are often not taken on the same level of government. Poor coordination within decentralized systems of government can prevent countries from achieving their goals.
ii	Equity matters: Infrastructure gaps are still significant, and vary substantially across subnational units. While starting points are much different, particularly across OECD and non-OECD countries, in many cases there are notable advances in reducing gaps. But progress has not been even. Country-wide statistics based on national averages can be misleading and hide deep disparities. Gaps can be particularly large across subnational jurisdictions (horizontal gaps); these gaps are increasingly structured along urban-rural lines, particularly in the developing world. This represents a major impediment to improving access to public services on an equitable basis, and for reducing poverty. Due to the shifting nature of gaps and the localized nature of infrastructure itself—often spanning across several jurisdictions—finding responsible agents to address these disparities constitutes a serious challenge.
iii	Efficiency matters: Many countries have already “invested” much in decentralization as well as subnational infrastructure provision in the last two decades, but the results are mixed. Efficiency cannot easily materialize in environments where responsibilities over the investment cycle or service delivery are unclear; or where public investment is carried out by-passing critical decision steps. The pressure to demonstrate results is increasing on behalf of citizens, but cannot be adequately addressed without looking deeper into institutional design issues. The challenge here lies in identifying the responsible levels of government for planning, financing, and executing investment, and ultimately delivering services with some standard of equity.

The responses to these three challenges are necessarily complex as evidenced by the efforts under way in many countries, and they require careful examination. This is what the following 13 chapters in this book attempt to do. Before turning to the discussion of these sections, we take a closer look at the main institutional aspects of decentralized infrastructure and public investment. As will become clear in the next section, decentralized infrastructure is quickly emerging as one of the greatest challenges in contemporary public finance policy and management.

The complexity of the institutional dimensions of decentralized infrastructure and public investment

Infrastructure provision entails the construction, operation, and maintenance of the long-lived physical assets required to deliver specific public services. There are different ways to classify types of infrastructure. A useful approach is to divide infrastructure into “network infrastructure,” such as roads, streets, bridges, electricity, and water; and “point infrastructure,” such as hospitals and school buildings, which is more common to the social sectors. The latter often require further inputs—such as teachers and health personnel—in order to provide full service delivery to citizens.

While practices vary, the investment cycle for infrastructure encompasses the following key steps.¹ Planning and project appraisal constitute the initial steps; this is followed by project selection and a decision to provide the necessary budgetary resources. Implementation entails procurement as well as contract management to account for changes during execution, before facilities can be operated and services delivered eventually. Ex-post evaluation of completed projects is usually the final step in the building process. After that come operation and more importantly maintenance. Each of these steps can be decentralized, or performed in a shared fashion across levels of government. Regulation of the service, including setting standards, can also be decentralized or shared among levels of government.

As a multi-sector, cross-cutting, and multi-level process, decentralized public investment typically involves a high number of actors and agents.

• At both subnational and national levels, it involves Ministries or Secretaries of Finance, planning entities, sector ministries, and service delivery units.

• In some settings, community associations play a large role, particularly in post-conflict countries with limited state presence.

• Infrastructure is also provided by public enterprises.

• With diverging models and approaches, public investment can involve private agents (Public-Private-Partnerships—or PPP as one form);² but not all governments handle private involvement under a unified project cycle, which creates a separate, often complex layer in decision-making and management.

• In aid-dependent countries, international development agencies can also play a major role.

The relationships among these players can be complex, and therefore also poorly defined in law and/or practice. From a territorial point of view it is noteworthy that some investments are carried out in single-purpose districts, which may or not coincide with territorial jurisdictions of (general) subnational governments. In addition, further complexity can be introduced through sub-tiers within the main levels, while having only some of them playing a role in infrastructure.

In this myriad of organizational possibilities for the provision of infrastructure in intergovernmental arrangements, three main models have emerged:

• Some countries provide a leading role to sector agencies, which at the national or subnational levels oversee or perform directly critical steps in the project cycle, such as performing planning functions and setting standards for project appraisal; some of these tasks can be centralized with sub-national governments having to follow them, independently of the level of central co-financing. Spain provides an example for this approach.

• Another group of countries emphasize the role of ministries of finance or planning as leading agencies, whether at the central or subnational levels. In federal systems such as the US and Canada federal governments have limited powers to regulate in many areas, so it is left to subnational governments to act with wide margins of autonomy. In other countries, subnational governments are required to follow the standards set by central government entities. The sector agencies keep only a marginal role in this model. South Korea is an example of this model.

• In another group of countries, particularly in the developing world, a community management model is applied. In these arrangements, planning and project selection is done from the bottom up, with marginal participation of subnational governments, if they are present at all. Particularly in post-conflict situations, limited state presence at any level of government requires different approaches. Indonesia and Cambodia are examples for this model.

In practice, the degree of formality with which these models are applied varies widely, particularly in developing countries with emerging intergovernmental frameworks. Often, the role of subnational governments can remain under-regulated giving rise to widely discretionary environments.

But regardless of the main model used a common trait is that decentralized infrastructure provision requires coordination among levels of government. Service standards or procurement rules tend to be shared to some extent; and even in the most decentralized countries, subnational governments are often required to adopt central regulations and standards. This is even more true for infrastructure which generates positive externalities or spillover effects to other jurisdictions, since it usually requires coordinated planning and central co-financing.

As an outcome of the above complexity of the institutional dimensions, the traditional labels that are used to characterize the degrees of subnational autonomy are not easily applicable to infrastructure provision. Even if formally labeled “autonomous,” “delegated,” or “deconcentrated,” public investment more often than not requires joint decisions, which cannot be easily coordinated. This is so independently of unitary or federal countries, or the specific decentralization model at hand. Given the usually high level of co-financing, subnational governments in practice are often subject to standards of quality, quantity, and access established by higher levels of government. Upper level authorities often also exercise monitoring and evaluation functions.

A discussion of the contributions

The individual contributions to this volume fall naturally in five main sections:

Part I Measuring infrastructure gaps: quantity and quality perspectives

How large are infrastructure gaps?: Access to infrastructure services is very disparate across the world regions. Irrespective of possible differences across the sectors, South Asia and Sub-Saharan Africa (SSA) have the largest infrastructure gaps compared to other regions of the world. By comparison, most of the OECD countries have already well-developed infrastructure and are able to focus on quality considerations. The measurement of infrastructure gaps is the main theme of Chapter 2 by Luis Alberto Andrés, Dan Biller, and Jordan Schwartz entitled “The Infrastructure Gap and Decentralization.”

Recognizing the different starting points in the stock of infrastructure is critical to assess improvements and progress. Another dimension is the quality of infrastructure. Deficiencies tend to be large in this dimension and even in the most advanced countries, quality challenges remain or are reappearing. Figure 1.1 tracks countries with regards to (i) their overall level of public investment spending in GDP terms,³ and (ii) their different levels of progress in quality as assessed by surveys.⁴ As is apparent, countries experience not only advances but also backward steps—a...

Table of contents

• Cover Page
• Half Title Page
• Series Page
• Title Page
• Copyright Page
• Contents
• List of Boxes
• List of Figures
• List of Maps
• List of Tables
• Notes on contributors
• Preface
• 1 Decentralization and infrastructure: From gaps to solutions
• Part I Measuring infrastructure gaps: Quantity and quality perspectives
• Part II Fundamentals in flux: Functions, finance, and equalization for decentralized public investment
• Part III Sectoral perspectives
• Part IV Investing into the invisible: Management and coordination of decentralized public investment
• Part V The political economy and corruption challenges
• Index