38491 271 Sustainable Development / Poverty Reduction and Economic Management February 2007 Findings reports on ongoing operational, economic, and sector work carried out by the World Bank and its member governments in the Africa Region. It is published periodically by the Operations Results and Learning Unit on behalf of the Region. The views expressed in Findings are those of the author/s and should not be attributed to the World Bank Group. Decentralizing Infrastructure Services: Lessons from the East Asia Experience Decentralization is the transfer of accountability for infrastructure responsibilities from the central services in a decentralized government to subnational agen- environment. cies empowered to act as in- creasingly autonomous entities Decentralization Approaches in within their geographical and the Infrastructure Sector functional domains. In theory, Infrastructure service provision decentralizing infrastructure involves a broad set of functions, services can deliver efficiency including setting investment gains when service benefits ac- priorities, building and operating crue mainly to the local popula- infrastructure facilities, and tion-- such as in water and sanita- financing capital and operation tion, urban transit, and waste ma- and maintenance requirements. nagement. Subnational agencies The extent to which each of these are indeed better placed than the functions is transferred to central government to tailor infra- subnational agencies defines a structure services to the needs of country's decentralization local constituencies (allocative approach for infrastructure efficiency) and deliver them at services. lower costs (productive efficiency). In practice, the economic benefits China of decentralizedinfrastructure In China, the central government services are by no means a given, plays a prominent role in setting as they are contingent upon investment priorities across effective coordination among tiers infrastructure sec-tors by dictating of governments ("regional targets for infrastructure coverage coordination") and accountability at local level. In this respect, mecha-nisms for results achieved. provision of infrastructure services remains highly The note presents the centralized. On the other hand, Findings decentralization approaches subnational governments have full adopted in China, Indonesia, and responsibility for executing the Philippines--three countries investments, operating infra- that have taken important steps in structure facilities, and framing decentralizing infrastructure their own urban development services. It then assesses how plans--including where to locate each country fared in addressing major capital projects and how to the key challenges of promoting sequence investments to meet the regional coordination and building national targets. Subnational governments also In the Philippines,subnational Promoting Regional have significant leeway in deci- borrowing is modest and con- Coordination ding how to mobilize funds for strained by a non-competitive Devolving responsibilities for infrastructure projects because credit market, which is monopo- infrastructure services to sub- they rely significantly on off-budget lized by government financial national governments poses com- revenue sources over which they institutions. plex coordination challenges in the have virtually total control (Ahmad presence of economies of scale and at al. 2000). Al-though subnational In both countries, decentraliza- spillover benefits. In both cases, governments are legally forbidden tion has largely reduced the regional coordination is essential to finance their deficit through functions of middle-tier levels of for the benefits of decentralization bonds and bank borrowing, they de government, creating a "missing to materialize (Box 1). facto raise credits (and bear the as- middle" in the architecture of de- sociated liabilities) through special centralization (see Box 1). In In China, regional coordination in purpose vehicles created for Indonesia, provinces lack hierar- infrastructure sectors is slowly financing infrastructure in- chical authority over city (kota) starting to emerge--the most vestment (IMF 1997). and districts (kabupaten) (Law 22/ ambitious project is perhaps the 1999). Although their role in establishment of a Pan-Pearl River In China, decentralized provision coordinating provincial-level de- Delta (Pan-PRD) Regional of infrastructure services is roo- velopment activities has been Cooperation and Development ted in a politically centralized recently enhanced (Law 32 2004), Area in 2004. The objective of the system based on a top-down line of their functional responsibilities Pan-PRD project is to facilitate the command that emphasizes ac- re-main largely undefined. In the construction and management of countability to the higher level of Philippines, provinces are autho- regional infrastructure facilities, government rather than to the rized to play a coordinating role which are expected to generate local constituencies. among cities and municipalities, significant spillover benefits, such but lack the financial and as interpro-vincial railway projects Indonesia and the Philippines technical capacity to perform such and inland waterways. Indonesia and the Philippines a role effectively (World Bank have adopted a "Big Bang" 2005). In Indonesia and the Philippines, approach to infrastructure de- the missing middle is obstructing centralization. As part of the In both countries, decentraliza- regional coordination in infra- decentralization initiatives tion was closely intertwined with structure, leading to inefficiency launched in these countries, their transition to democracy and in service provision and under- virtually complete responsibility for it was accompanied by the promise investment in regional infra- infrastructure services was of greater "downward" account- structure. In Indonesia, a lack of transferred to subnational ability for results achieved. regional coordination has resul-ted governments, almost overnight. in a multiplicity of standards in In both countries, subnational Comparing Decentralization transport regulation, thus dis- infrastructure investment is Approaches torting trade across municipa- financed mostly through central In spite of the heterogeneous lities. In South Sulawesi for grants and, to a lesser extent, own- environments in which decen- example, trucks are required to source revenues. Subnational tralization has been implemented carry three specific licenses: one borrowing for infrastructure in the three countries, important for interprovincial transport, one investment is limited. In Indo- lessons can be learned by for intraprovincial transport, and nesia, long-term subnational comparing how each has fared in one for entering the subdistricts borrowing from the central govern- promoting regional coordination (kecamatan). The first two li- ment is legally restricted to re- and building accountability for censes are issued at the provincial venue-generating infrastruc-ture infrastructure services in a de- level, while the third one is issued projects and de facto confined centralized environment. at local level. In the Philippines, a tofinancing investment by muni- lack of coordination in managing cipal water enterprises (PDAMs). secondary road networks has led to severe maintenance backlogs. example of ineffective coordina- achieved. This approach under- This has resulted in a deterio- tion among municipalities. The scores the power of top-down per- ration of provincial roads, whose lead role played by the largest formance targets in boosting sub- status is worse than those of city municipality (Los Baņos) in dri- national infrastructure invest- and mu-nicipal roads--in 2000, ving the consolidation process ment. However, it also presents only 21 percent of provincial roads generated the perception between some drawbacks. First, centrally were paved, compared to 77 the two smaller municipalities set performance indicators, when percent of city and 34 percent of that the consolidation was not in poorly selected, can fail to deliver municipal roads. The small size of their best interest. As a result, the the intended effects. For ex-ample, utili-ties has also resulted in smaller towns tried to exit the nationally established coverage diseconomies of scale in water grouping, jeopardizing the prospect targets for wastewater treatment supply and sanitation services. In of attracting private sector (WWT) plants are expressed in the absence of regional agencies participation in the water sector terms of capacity of completed capable of leading the aggregation (ERM et al. 2005). plants. However, targets are met process, consolidation of service regardless of whether the WWT provision is mainly emerging as a Building Accountability plants are in operation or not. This voluntary process driven by the In the decentralization process, it gives subnational governments an municipalities. However, volun- is essential to build upward incen-tive to invest in new WWT tary consolidation brought a accountability to higher tiers of plants to meet the national number of coordination challen- government and downward standards, but not to operate and ges. For example, the aggregation accountability to local consti- maintain the existing facilities, of three neighboring muni- tuencies to ensure that the eco- which have been running at 50 cipalities to form the Laguna Lo- nomic benefits of decentralization percent or less of designed capacity. cal Government Unit was stalled are achieved. Second, the targets do not provide by lack of agreement on the municipalities with an incentive to allocation of water rights. The In China, decentralization is em- consider economies of scale in Laguna Water District, a water bedded in a centralized political service provision. For example, in utility supplying three neigh- structure, which highly rewards the Guangdong River delta, China, boring municipalities, is another upward accountability for results each of 51 administrative districts built a wastewater treatment facility, although cooperative Box 1. The Missing Middle agreements based on economies of A missing middle in the intergovernmental structure arises when scale could generate significant decentralization unduly weakens the role of middle-tier agencies by efficiency savings. transferring the bulk of functions and/or financial resources to the lowest In China, the balance of account- tiers of government (that is, districts in Indonesia and cities and municipalities in the Philippines). A missing middle can jeopar-dize the benefits of ability is tilted upward at the ex- decentralization in the presence of economies of scale or spillover benefits pense of downward accountability, in infrastructure service provision: with limited scope for civil society 1. Economies of scale call for the aggregation of neighboring subnatio-nal participation in infrastructure governments into a single administrative unit for the delivery of more efficient service provision. For example, in services (albeit at the expense of downward accountability). In the presence the poor rural province of Guizhou, of economies of scale, middle-tier agen-cies are needed to facilitate the households can choose whether to aggregation process, especially when the bargaining power is unbalanced receive private water connection amount the subnational govern-ments. or express reluctance to pay for it. 2. Spillover benefits arise when the benefits of infrastructure services However, community involvement span across subnational governments. Spillover benefits call for the is limited to information sharing; involvement of middle-tier agencies in the management of shared clients do not have a voice on tariff infrastructure facilities--for example, establishing river basin organizations policy, nor can they opt for less is recommended for the effective management of water pro-duction when expensive alternatives, such as water resources are shared among subnational governments. public stand posts. In the process of dismantling the practice is also emerging as an accountability is deemed to fail if old autocratic regimes, Indonesia important tool to enhance not accompanied by strong mo- and the Philippines failed to accountability. In the Philippines nitoring and evaluation, and effec- establish effective monitoring and for example, awards are granted to tive public information systems. evaluation mechanisms that can best performing local governments hold subnational governments in specific sectors (such as · Promoting innovations in local accountable to the central govern- sanitation and environmental governance-- The innovative so- ment. Benchmarking the quality protection) to reward innovative lutions adopted by a number of of infrastructure services among approaches and encourage their subnational governments in subnational governments is the replication nationwide (see Indonesia and Philippines first step to establish an effective www.galingpook. org for more indicate that horizontal monitoring system. In Indonesia information). accountability towards civil for example, benchmarking the society organizations can partially performance of PDAMs would Conclusions compensate for weak formal enable the central government to Important lessons can be drawn by accountability mechanisms, direct financial support to the best comparing how the infrastructure provided that information is made performing utilities. decentralization approaches adop- available to the public through ted in China, Indonesia, and the mechanisms of external scrutiny In Indonesia and the Philippines, Philippines fared in promoting (such as the media or the decentralization reforms have not regional coordination and building judiciary). delivered the promised dividends accountability: in terms of downward accountabi- lity for results achieved. In the · Meeting coordination chal- Further Reading Philippines, for example, the short lenges--There is a need to forge a (three-year) term for elected of- new role for middle-tier agencies Ahmad, Ehtisham, Li Keping, and ficials attenuates accountability to to coordinate regional infra- Thomas Richardson. 2000. local citizens for planning and im- structure development, particu- "Recentralization in China?" IMF plementing longterm, multiyear larly in Indonesia and the Philip- Conference on Fiscal Decen- infrastructure projects (World Bank pines, where lack of regional tralization 20­21 November. 2005). coordination has led to inefficien- cy in infrastructure service pro- ERM in association with Stephen Despite the weak institutional vision. The challenge is to estab- Meyers Associates and Hydro- framework for accountability, a lish regional agencies with the conseil, and William D. Kingdom. growing number of subnational legal mandate and the financial 2005. "Models of aggre-gation for governments in both countries are and the technical capacity to play water and sanitation provision." experimenting with innovative such a role. Water Supply and Sani-tation solutions based on civil society em- Sector Board Working Note N.1. powerment to reinforce formal · Balancing upward and down-ward accountability mechanisms. In the accountability-- Decentralized IMF. 1997. "Inter-governmental Philippines, Naga City succeeded infrastructure provision has to be Fiscal Relations-- the Chinese in strengthening the ingrained in a framework that System in Perspective." WP/97/ accountability of its procurement promotes upward and downward 129. process by making publicly accountability. The decentrali- available (in newspapers and on the zation approach in China World Bank. 2005. "Philippines: Internet) all unit prices of awarded underlines the efficiency costs of Meeting Infrastructure Chal- bids. In Indonesia, non- tilting the balance of accoun- lenges." governmental organizations have tability too far upward. The successfully monitored water approach in Indonesia and coverage and quality as part of pilot Philippines demonstrates that any projects undertaken in 24 attempt to shift the balance from PDAMs.Disseminating best. top-down to local political This article has been reproduced from the World Bank's PREM Notes number 109, June 2006. The PREMnote was written by Elisa Muzzini, East Asia and Pacific Infrastructure Unit (EASIN). The note is based on the Flagship Report "East Asia Decen-tralizes: Making Local Govern-ments Work," Poverty Reduction and Economic Manage-ment (PREM). emuzzini@worldbank.org Findings Findings can be accessed via the World Bank Group's website at http://www.worldbank.org/ Click on Publications, then Periodicals. 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