Final Draft: 10 May 2011. Decentralization: Resources assigned by Iraqs Central/Federal Government to regional and provincial governments.

1 Different understandings of decentralization Most countries in modern times, even the most centralized ones, seem to want to claim that they are decentralizing. Decentralization has become something of a fashion. But it can mean anything and nothing. Decentralization can mean giving some power to lower level administrations (political decentralization). It can mean giving them some resources for them to spend (financial ). It can mean giving them the authority to raise their own revenues (fiscal), presumably, for them to decide how to spend them. And it could simply allow certain things (e.g. issuance of passport, payment of certain taxes, say, at provincial level) formerly done centrally, to be done at lower level of government even though still done by central government (administrative de centralization). But in fact, decentralization has, to some extent, become an end in itself, not a means. So, analyzing it as a means, as this note intends, may not give the best results and could end-up being pessimistic. The theory behind decentralization is that lower level governments, being closer to the people, in some ways, would know better what their needs are and how to meet them. This is very much a theory, and is often proven wrong, and, in fact, the record is uneven. In other cases, decentralization is based on devolution, especially in (con)federal states, where it is posited that, in the past, local governments may have enjoyed authority superior to what they now have and which they, at some point ceded to the central government. Being given either resources to spend, or the authority to raise resources to be then spent, in some way, devolves, or returns to them, the authority they once had.2 The principle of subsidiarity as used in the EU, namely, that decisions need to be taken at the lowest possible level (supranational, national, regional, provincial, municipal, local) is also a form of decentralization, though this is not currently on the table in Iraq. Another justification for decentralization (it should perhaps be called delegation) would be to reduce, or share in the task of central policy or decision-making, by asking another group (e.g the provincial government) to plan, program, execute necessary expenditure, whether for operations or development in their area of competence. In this case, it would be the planning/programming

By Michel Del Buono, Sr. Economic Advisor in UNAMI s Interagency Information Analysis Unit (IAU) in Amman. He thanks many colleagues for help but retains sole responsibility for any errors. Views are the author s and not those of UNAMI or the IAU. Holds Bachelor s degree in economics/accounting from McGill, and Ph.D. in Economics from Cornell. 2 Canada, Switzerland, Australia, to some extent, the USA come to mind here. Historically, the Ottoman and, Austro-Hungarian empires, and Yugoslavia are also examples, though in all these cases decentralization, induced by loss of central level authority, led to the demise of the (con)federal structure.

that would be the decentralized activity, since the downstream activities are conducted (by the local government) as an agent of the Central Government who acts as principal.3 Iraq is a centralized country that wishes to ride the fashion, and reap the benefits of decentralization, or perhaps also share the blame for any bad performance with lower-level governments. The theory of decentralization, if accepted as correct, would mean/imply giving lower level government most of the authority (i.e. if decentralization is good, then more of it is always good), EXCEPT, for what the provincial government cannot do (rule of law or legality, foreign affairs, representation, postage stamps, money, regulation of market failures, war,, these what economists call the classic public goods that the market cannot provide). In the end, however, control, and the reaping of credit (earning of political capital) with the electorate overwhelm whatever gain in the efficiency of public spending (benefit to the citizenry) might be achieved through decentralization, and so, the process finds its rather rigid limit. The advantages of decentralization thus appear very limited, and require very strict conditions to materialize. The disadvantages are mirror images of the advantages. Smaller groups (in local governments) may be closer to the people, but they are also more closely related among themselves (interests, kinship, clan/tribal allegiances) making it more difficult to be fair and treating everybody in the same fashion (arms-length transactions, impersonal relationships governed by rules and regulations, universalistic principles in use, not particularistic ones) . A smaller, more homogeneous group may also collude more easily, and so engage more easily in corruption and other inappropriate behavior. To a certain extent, the very distance of the central authorities helps avoid these kinds of problems. Decentralization also has real financial costs. Collecting revenues at the provincial level implies some duplication of efforts adding to administrative costs, and adding costs to the citizenry of having to face two different sets of taxation rules. Managing expenditures at local level requires a certain duplication of the central tasks of the MinFin. Infrastructure investments (roads, pipelines, rail and power lines, etc..) often require coordination among territorial units and are therefore unsuited for decentralization, or more easily dealt with through a centralized approach. For example, in Canada, the Province of Quebec has opted out of many Federal programmes and in part because of the higher costs of doing things alone, the province is the most heavily taxed in Canada. In Italy, a misguided decentralization gave regions discretion over the energy sector: it has become impossible to build power plants, high voltage lines, or LNG regassifiers and attendant gas pipelines because the many regions that the lines must cross never agree on the right of way, details, specifications, etc. In Iraq, some misguided attempts at decentralization are responsible for introducing inefficiencies, such as setting-up power plants in each governorate, refineries, and other facilities

This also introduces other problems, as the goals of the principal and those of the agent are never fully congruent.

that may or may not be easily decentralizable without substantial costs (investment or operational, see below).

Decentralization in Iraq A suitable conclusion for the earlier section could be that decentralization might be less important than the space it takes in debates, and that one its main drivers, in addition to the legitimate reasons mentioned earlier, could be rent-seeking behavior on the part of local (provincial, municipal) authorities, i.e. looking for funds over which to exercise discretionary power.4 A probably more useful or efficient form of decentralization could be (if possible, feasible) to create larger blocks of Governorates (which are after all, pretty small territorial and population units) with appropriate characteristics (to be called maybe regions) and to decentralize more of the budget. These larger territorial/population units would have fewer of the drawbacks of governorate-level decentralization and help reduce administrative costs (to have four regional governments in Iraq, instead of 15, plus KRG).5. But one should always be careful not to decentralize those sectors/activities that are more advantageously treated in centralized fashion. In Iraq, allocations of resources for spending by provincial governments have not been generous in the past, except in the case of the KRG where the central budget transfers 17% of the budget net of Sovereign spending (recognizing that in the KRG area, it is the regional administration that provides all public services while in the other governorates, it is still and mainly the central government). All other 15 Governorate together receive transfers of about 5% of the budget total. The practice has been for the amount going to each governorate to depend essentially on relative population size, but more recently, there is an additional allocation of petrodollars to Governorates that either produce or process crude oil, at the rate of $ 1 per barrel of oil (produced or processed). With the marked growth in oil production now all but certain, the allocation of petrodollars is bound to increase inequalities in fiscal transfers to provinces. Hopefully, this will not lead to a proliferation of small refineries, one in each governorate (as might be happening with power generation plant)6. In 2011, according to the approved budget (20Feb), the 15 Governorates outside KRG received a total of IQD 5.111 trillion ($ 4.368 billion) of which IQD 0.497 trillion for operating

In this sense, the insistence of the Iraqi Federal Government of only disbursing funds against project documents is not so bad, even if it slows the process. Few if any governments/ministries of finance like to sign blank cheques. 5 But, larger second-tier governments would not really be much closer to the people than the central/federal government is assuming that this closeness is, or adds value to the socio/political organization of the state. 6 Actually, a large number of small refineries (topping units, really) already exist in Iraq. Most of them do not function but if making them work will supply federal/petrodollars to their locations, these might start operating, with pretty bad results for everybody concerned.

expenditures and IQD 4.355 trillion for investment expenditures. 7 The KRG received a total of IQD 11.179 trillion ($ 9.555 billion) of which IQD 4.355 trillion for investment expenditures. The total amount, from the Central Government budget going to other levels of government is therefore IQD 16.290 or 16.85% of the total budget (of IQD 96.663 trillion). These amounts represent some increase over the allocations of 2010 and 2009 but petrodollars 8 have not been fully additional as central government declarations might have led to believe. In fact, allocations (revised) in 2009 totaled IQD 3.515 trillion and for 2010, IQD 4.348 trillion (proposed), an increase of only about half a trillion IQD per annum (approx. $ 400 million), or near 10% per year. In terms of actual expenditure performance, partial data for 2009 indicates a reasonable performance, with overall capital budget expenditure execution of 81%. Three DIBs Governorates (areas of disputed internal boundaries) held the tail-end of performance, with Ninewa (the second largest allocation, after Baghdad) at just 41%, Salah ad Din, at 70%, and Kirkuk at 74%. Diyala scored exactly on the overall average, with execution of 81% while Baghdad (by far the largest budget) scored below the average at 77%. Recent policy amendments regarding expenditures by provincial governments will permit the carry-over of unspent allocations. Also, in 2011, the Federal Government has disbursed to governorates an advance of 30% of the amounts allocated. These are positive signs, going in the direction desired by the provincial governments, who had complained of: (a) being forced to write project documents for all expenditures, and losing the allocations once they took time to design project documents, and (b) of delays in transferring funds for spending. In conclusion, it might be unwise to put too much (more) spending authority at Governorate level, as these are small territorial/population units and their human and managerial resources might be overstretched by really large investment expenditures. The level reached now may be close to the optimal: not negligible but not excessive. It should not be raised unless and until governorate- level management and monitoring of investment expenditure reaches a good degree of effectiveness, as demonstrated by more consistently high rates of implementation and timely reporting.

To my knowledge, this includes both the population-related amounts and the petrodollars. Please note that data from three sources, purporting to represent the same budget lines, show discrepancies, though not large ones. 8 Petrodollars in 2011 amounted to IQD 1.634 trillion, but total funds going to the 15 Governorates rose only about IQD 500 billion, or half a trillion. Source: USAID Iraq/Tatweer. Another source shows petrodollars for 2011 as $ 1.4 billion (Federal Budget Analysis, Rael, USAID)

Budget Estimates for Provinces (in billion dinars)

2009 (Revised) Province Total Basra Ninewa Baghdad Dhi Qar Diyalah Babil Anbar Maysan Wasit Kirkuk Najaf Diwaniyah Muthanna Karbala Sala ad-Din 309.6 355.2 840.9 257.7 158.8 205.5 180.1 126.7 138.9 159.2 146.3 160.7 895.9 201.3 184.0 Projects and Reconstruction 237.2 278.0 650.3 168.3 122.4 158.1 132.6 94.4 107.1 117.3 109.7 102.0 66.3 91.8 114.8 Total Operating Total Expenditures 72.5 305.4 77.2 448.6 190.7 937.1 89.4 228.0 36.4 261.2 47.4 229.2 47.5 197.4 32.4 128.4 31.8 153.7 41.9 186.5 36.6 153.8 58.7 179.6 23.3 955.6 109.5 642.1 69.3 201.9 2010 (Proposed) Total Projects and Operating Reconstruction Expenditures 220.0 84.4 287.5 161.1 637.5 299.6 165.0 63.0 122.5 138.7 152.5 76.7 130.0 67.4 90.0 38.4 102.5 51.2 115.0 71.5 110.0 43.8 131.0 48.6 65.0 30.6 90.0 552.1 112.5 89.4

Total

3,514.5

2,550.0

964.5

4,348.5

2,531.0

1,817.5

Source: Iraq MinFin

2009 Provincial Capital Budget Execution (in billion dinars) (through December 2009) Province
Anbar Babil Baghdad Basra Dhi Qar Diyalah Karbala Kirkuk Maysan Muthanna Najaf Ninewa Diwaniyah Salah ad Din Wasit

Budgeted
132.6 158.1 651.1 237.2 168.3 122.4 91.8 117.3 94.4 66.3 109.7 278.0 102.0 114.8 107.1

Actual Expenditure
132.6 158.1 498.2 200.8 167.6 98.7 91.8 87.1 94.4 55.7 109.7 114.4 102.0 80.6 84.1

%
100% 100% 77% 85% 100% 81% 100% 74% 100% 84% 100% 41% 100% 70% 79%

Total
Source: MoP

2,550.8

2,075.6

81%