The World Bank PREMnotes JUNE 2006 NUMBER 109 PUBLIC SECTOR Decentralizing Infrastructure Services: Lessons from the East Asia Experience Since the 1990s, most East Asian countries have increasingly shifted responsibilities for infrastructure services to subnational tiers of governments. This note takes stock of the results so far and draws lessons of experience. Decentralization is the transfer of responsibilities China from the central government to subnational agen- cies empowered to act as increasingly autonomous In China, the central government plays a promi- entities within their geographical and functional nent role in setting investment priorities across domains. In theory, decentralizing infrastructure infrastructure sectors by dictating targets for infra- services can deliver efficiency gains when service structure coverage at local level. In this respect, benefits accrue mainly to the local population-- provision of infrastructure services remains highly such as in water and sanitation, urban transit, and centralized. On the other hand, subnational gov- waste management. Subnational agencies are ernments have full responsibility for executing indeed better placed than the central government investments, operating infrastructure facilities, to tailor infrastructure services to the needs of and framing their own urban development local constituencies (allocative efficiency) and plans--including where to locate major capital deliver them at lower costs (productive efficiency). projects and how to sequence investments to meet In practice, the economic benefits of decentralized the national targets. The economic infrastructure services are by no means a given, as Subnational governments also have significant lee- they are contingent upon effective coordination benefits of way in deciding how to mobilize funds for infra- among tiers of governments ("regional coordination") structure projects because they rely significantly decentralization and accountability mechanisms for results achieved. on off-budget revenue sources over which they are by no means The note presents the decentralization approaches have virtually total control (Ahmad at al. 2000). a given. adopted in China, Indonesia, and the Although subnational governments are legally for- Philippines--three countries that have taken bidden to finance their deficit through bonds and important steps in decentralizing infrastructure bank borrowing, they de facto raise credits (and services. It then assesses how each country fared in bear the associated liabilities) through special pur- addressing the key challenges of promoting pose vehicles created for financing infrastructure regional coordination and building accountabili- investment (IMF 1997). ty for infrastructure services in a decentralized In China, decentralized provision of infrastruc- environment. ture services is rooted in a politically centralized Decentralization Approaches in system based on a top-down line of command that emphasizes accountability to the higher the Infrastructure Sector level of government rather than to the local con- Infrastructure service provision involves a broad stituencies. set of functions, including setting investment pri- orities, building and operating infrastructure facil- Indonesia and the Philippines ities, and financing capital and operation and Indonesia and the Philippines have adopted maintenance requirements. The extent to which a "Big Bang" approach to infrastructure each of these functions is transferred to subna- decentralization. As part of the decentral- tional agencies defines a country's decentralization ization initiatives launched in these coun- approach for infrastructure services. tries, virtually complete responsibility for FROM THE DEVELOPMENT ECONOMICS VICE PRESIDENCY AND POVERTY REDUCTION AND ECONOMIC MANAGEMENT NETWORK infrastructure services was transferred to Box 1. The Missing Middle subnational governments, almost overnight. A missing middle in the intergovernmental structure arises when In both countries, subnational infrastructure decentralization unduly weakens the role of middle-tier agencies by investment is financed mostly through central transferring the bulk of functions and/or financial resources to the low- grants and, to a lesser extent, own-source rev- est tiers of government (that is, districts in Indonesia and cities and enues. Subnational borrowing for infrastructure municipalities in the Philippines). A missing middle can jeopardize the investment is limited. In Indonesia, long-term benefits of decentralization in the presence of economies of scale or subnational borrowing from the central govern- spillover benefits in infrastructure service provision: ment is legally restricted to revenue-generating infrastructure projects--and de facto confined to 1. Economies of scale call for the aggregation of neighboring subna- financing investment by municipal water enter- tional governments into a single administrative unit for the deliv- prises (PDAMs). In the Philippines, subnational ery of more efficient services (albeit at the expense of downward borrowing is modest and constrained by a non- accountability). In the presence of economies of scale, middle-tier competitive credit market, which is monopolized agencies are needed to facilitate the aggregation process, especial- by government financial institutions. ly when the bargaining power is unbalanced amount the subna- tional governments. In both countries, decentralization has largely 2. Spillover benefits arise when the benefits of infrastructure servic- reduced the functions of middle-tier levels of govern- es span across subnational governments. Spillover benefits call ment,creatinga"missingmiddle"inthearchitectureof for the involvement of middle-tier agencies in the management of decentralization (see Box 1). In Indonesia, provinces shared infrastructure facilities--for example, establishing river basin lack hierarchical authority over city (kota) and districts organizations is recommended for the effective management of (kabupaten) (Law 22/1999). Although their water production when water resources are shared among subna- role in coordinating provincial-level develop- tional governments. ment activities has been recently enhanced (Law 32/2004), their functional responsibilities remain largely undefined. In the Philippines, ambitious project is perhaps the establishment of provinces are authorized to play a coordinating a Pan-Pearl River Delta (Pan-PRD) Regional role among cities and municipalities, but lack the Cooperation and Development Area in 2004. The financial and technical capacity to perform such a role objective of the Pan-PRD project is to facilitate effectively (World Bank 2005). the construction and management of regional In both countries, decentralization was closely infrastructure facilities, which are expected to intertwined with their transition to democracy generate significant spillover benefits, such as and it was accompanied by the promise of greater "downward" accountability for results achieved. interprovincial railway projects and inland waterways. Comparing Decentralization In Indonesia and the Philippines, the missing middle is obstructing regional coordination in Approaches Economies of infrastructure, leading to inefficiency in service scale and spillover In spite of the heterogeneous environments in provision and underinvestment in regional infra- which decentralization has been implemented in structure. In Indonesia, a lack of regional coordi- benefits call for the three countries, important lessons can be nation has resulted in a multiplicity of standards regional learned by comparing how each has fared in pro- in transport regulation, thus distorting trade coordination in moting regional coordination and building across municipalities. In South Sulawesi for exam- accountability for infrastructure services in a ple, trucks are required to carry three specific decentralized decentralized environment. licenses: one for interprovincial transport, one for infrastructure intraprovincial transport, and one for entering the Promoting Regional Coordination subdistricts (kecamatan). The first two licenses are service provision. issued at the provincial level, while the third one Devolving responsibilities for infrastructure serv- is issued at local level. In the Philippines, a lack of ices to subnational governments poses complex coordination in managing secondary road net- coordination challenges in the presence of works has led to severe maintenance backlogs. economies of scale and spillover benefits. In both This has resulted in a deterioration of provincial cases, regional coordination is essential for the roads, whose status is worse than those of city and benefits of decentralization to materialize (Box 1). municipal roads--in 2000, only 21 percent of provincial roads were paved, compared to 77 per- In China, regional coordination in infrastructure cent of city and 34 percent of municipal roads. sectors is slowly starting to emerge--the most The small size of utilities has also resulted in dis- PREMNOTE JUNE 2006 economies of scale in water supply and sanitation In China, the balance of accountability is tilted services. In the absence of regional agencies capa- upward at the expense of downward accountabili- ble of leading the aggregation process, consolida- ty, with limited scope for civil society participa- tion of service provision is mainly emerging as a tion in infrastructure service provision. For exam- voluntary process driven by the municipalities. ple, in the poor rural province of Guizhou, house- However, voluntary consolidation brought a num- holds can choose whether to receive private water ber of coordination challenges. For example, the connection or express reluctance to pay for it. aggregation of three neighboring municipalities to However, community involvement is limited to form the Laguna Local Government Unit was information sharing; clients do not have a voice stalled by lack of agreement on the allocation of on tariff policy, nor can they opt for less expensive water rights. The Laguna Water District, a water alternatives, such as public stand posts. utility supplying three neighboring municipalities, In the process of dismantling the old autocratic is another example of ineffective coordination regimes, Indonesia and the Philippines failed to among municipalities. The lead role played by the establish effective monitoring and evaluation largest municipality (Los Baņos) in driving the con- mechanisms that can hold subnational govern- solidation process generated the perception ments accountable to the central government. between the two smaller municipalities that the Benchmarking the quality of infrastructure servic- consolidation was not in their best interest. As a es among subnational governments is the first result, the smaller towns tried to exit the grouping, step to establish an effective monitoring system. jeopardizing the prospect of attracting private sec- In Indonesia for example, benchmarking the per- tor participation in the water sector (ERM et al. formance of PDAMs would enable the central 2005). government to direct financial support to the best The benefits of Building Accountability performing utilities. decentralization In the decentralization process, it is essential to In Indonesia and the Philippines, decentraliza- are contingent build upward accountability to higher tiers of gov- tion reforms have not delivered the promised ernment and downward accountability to local dividends in terms of downward accountability upon upward and constituencies to ensure that the economic bene- for results achieved. In the Philippines, for downward fits of decentralization are achieved. example, the short (three-year) term for elected officials attenuates accountability to local citi- accountability for In China, decentralization is embedded in a cen- zens for planning and implementing long-term, results achieved. tralized political structure, which highly rewards multiyear infrastructure projects (World Bank upward accountability for results achieved. This 2005). approach underscores the power of top-down per- formance targets in boosting subnational infra- Despite the weak institutional framework for structure investment. However, it also presents accountability, a growing number of subnational some drawbacks. First, centrally set performance governments in both countries are experimenting indicators, when poorly selected, can fail to deliv- with innovative solutions based on civil society er the intended effects. For example, nationally empowerment to reinforce formal accountability established coverage targets for wastewater treat- mechanisms. In the Philippines, Naga City suc- ment (WWT) plants are expressed in terms of ceeded in strengthening the accountability of its capacity of completed plants. However, targets are procurement process by making publicly avail- met regardless of whether the WWT plants are in able (in newspapers and on the Internet) all unit operation or not. This gives subnational govern- prices of awarded bids. In Indonesia, non- ments an incentive to invest in new WWT plants governmental organizations have successfully to meet the national standards, but not to operate monitored water coverage and quality as part of and maintain the existing facilities, which have pilot projects undertaken in 24 PDAMs. been running at 50 percent or less of designed Disseminating best practice is also emerging as an capacity. Second, the targets do not provide important tool to enhance accountability. In the municipalities with an incentive to consider Philippines for example, awards are granted to best economies of scale in service provision. For exam- performing local governments in specific sectors ple, in the Guangdong River delta, China, each of (such as sanitation and environmental protection) 51 administrative districts built a wastewater to reward innovative approaches and encourage treatment facility, although cooperative agree- their replication nationwide (see www.galing- ments based on economies of scale could generate pook.org for more information). significant efficiency savings. PREMNOTE JUNE 2006 Conclusions ber of subnational governments in Indonesia and Philippines indicate that Important lessons can be drawn by comparing horizontal accountability towards civil soci- how the infrastructure decentralization approach- ety organizations can partially compensate es adopted in China, Indonesia, and the for weak formal accountability mecha- Philippines fared in promoting regional coordina- nisms, provided that information is made tion and building accountability: available to the public through mechanisms of external scrutiny (such as the media or the · Meeting coordination challenges--There is a judiciary). need to forge a new role for middle-tier agen- cies to coordinate regional infrastructure This PREMnote was written by Elisa Muzzini, development, particularly in Indonesia and East Asia and Pacific Infrastructure Unit the Philippines, where lack of regional coor- (EASIN). The note is based on the Flagship dination has led to inefficiency in infrastruc- Report "East Asia Decentralizes: Making Local ture service provision. The challenge is to Governments Work," Poverty Reduction and establish regional agencies with the legal Economic Management (PREM). mandate and the financial and the technical Further Reading capacity to play such a role. · Balancing upward and downward accounta- Ahmad, Ehtisham, Li Keping, and Thomas bility--Decentralized infrastructure provi- Richardson. 2000. "Recentralization in China?" sion has to be ingrained in a framework that IMF Conference on Fiscal Decentralization promotes upward and downward accounta- 20­21 November. bility. The decentralization approach in China ERM in association with Stephen Meyers underlines the efficiency costs of tilting the Associates and Hydroconseil, and William D. balance of accountability too far upward. The Kingdom. 2005. "Models of aggregation for water approach in Indonesia and Philippines and sanitation provision." Water Supply and demonstrates that any attempt to shift the Sanitation Sector Board Working Note N.1. balance from top-down to local political accountability is deemed to fail if not accom- IMF. 1997. "Inter-governmental Fiscal Relations-- panied by strong monitoring and evaluation, the Chinese System in Perspective." WP/97/129. and effective public information systems. World Bank. 2005. "Philippines: Meeting · Promoting innovations in local governance-- Infrastructure Challenges." The innovative solutions adopted by a num- This note series is intended to summarize good practices and key policy findings on PREM- related topics. The views expressed in the notes are those of the authors and do not necessar- ily reflect those of the World Bank. PREMnotes are widely distributed to Bank staff and are also available on the PREM Web site (http://prem). 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