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Unit 5: Organizing

Fiscal Decentralization Notes
Dispersal of financial responsibility is a core component of decentralisation. If local governments
and private organizations are to carry out decentralized functions effectively, they must have
an adequate level of revenues—either raised locally or transferred from the central government—
as well as the authority to make decisions about expenditures. Fiscal decentralization can take
many forms, including:
• self-financing or cost recovery through user charges,
• co-financing or co-production arrangements through which the users participate in providing
services and infrastructure through monetary or labor contributions;
• expansion of local revenues through property or sales taxes, or indirect charges;
• intergovernmental transfers that shift general revenues from taxes collected by the central
government to local governments for general or specific uses; and
• authorization of municipal borrowing and the mobilization of either national or local
government resources through loan guarantees.

Notes In many developing countries local governments or administrative units possess
the legal authority to impose taxes, but the tax base is so weak and the dependence
on central government subsidies so ingrained that no attempt is made to exercise
that authority.

Economic Decentralization

Privatization and deregulation shift responsibility for functions from the public to the private
sector and is another type of decentralization. Privatization and deregulation are usually, but
not always, accompanied by economic liberalization and market development policies. They
allow functions that had been primarily or exclusively the responsibility of government to be
carried out by businesses, community groups, cooperatives, private voluntary associations,
and other non-government organizations.

Privatization

Privatization can range in scope from leaving the provision of goods and services entirely to
the free operation of the market to “public-private partnerships” in which government and the
private sector cooperate to provide services or infrastructure. Privatization can include:
• allowing private enterprises to perform functions that had previously been monopolized
by government;
• contracting out the provision or management of public services or facilities to commercial
enterprises indeed, there is a wide range of possible ways in which function can be
organized and many examples of within public sector and public-private institutional
forms, particularly in infrastructure;
• financing public sector programs through the capital market (with adequate regulation
or measures to prevent situations where the central government bears the risk for this
borrowing) and allowing private organizations to participate; and
• transferring responsibility for providing services from the public to the private sector
through the divestiture of state-owned enterprises.
Privatization cannot in the real sense be considered equivalent to decentralisation.

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