Issue 1: Local governments at the same nominal level and their capacity

First, in many countries, local governments at the same nominal level may vary considerably in their capacities. West Bank and Gaza, for example, has municipalities which vary in population size from about 10,000 to over 1 million, with management capacities to match. Differences in fiscal capacity may be recognized in the equity component of the intergovernmental fiscal system, however, the fact that management and administrative capacities also may vary substantially is rarely accounted for. It is useful to have the legal/regulatory system recognize significant difference in management capacities by a classification of local government within levels. Policies and strategies to address these differences may then be coherently considered.

Issue 2: Local government borrowing and the capacity to repay

Second, local governments should have the ability to borrow when they have the capacity to repay. However, for moral hazard reasons discussed in greater detail in the borrowing subsection of the KMS every effort must be made to promote the perspective that local government loans are internal obligations of local governments and not of higher levels of government unless specifically stated otherwise. The importance as well as the difficulties of doing this is well illustrated by the circumstances of subnational debt in Brazil. The legal and regulatory framework can support this message by specifying the conditions under which local governments may borrow, the limits of those borrowings, the reporting requirements for debt and debt service and the penalties for violating the rules.

Third, local government laws have not always anticipated the options, including private participation and managed competition, that may be pursued in the delivery of local public services. As a consequence legal barriers may inappropriately restrain the ability of local authorities to select the most desirable options for the delivery of decentralized services. China’s cities have been imaginative in innovating and delivering some services not anticipated in the legal and regulatory framework in which they operate; nevertheless, even under these circumstances rationalization is desirable. Inappropriate barriers and constraints should be avoided or corrected in the design and detailing of the legal and regulatory framework for decentralization.

Fourth, voting democracy is often considered as satisfying the conditions for citizen participation and voice in the design of decentralized systems, but in practice this may not be sufficient. Meaningful participation requires that citizens be informed and that their voices have impact where consequences are immediate. The legal/regulatory system needs to provide for, at minimum, full, timely and easily accessible public disclosure of resource allocation decisions - in budgets, in procurements, and in expenditure programs. An output/ outcome orientation to expenditure management would be even more desirable. Uganda is preparing to design and publish readily accessible budgets for all levels of government as part of an expenditure management reform program which emphasizes output/outcome orientation. In addition, there must be reliable, secure access by citizens to the means to enforce appropriate penalties for violations of rules.

Fifth, terms of office for local political leaders is closely related to issues of authority and accountability. Mayors need incentives to focus on at least the medium-term, rather the solely the short-term. This requires a long enough term or potential terms to be able to be seen to be accomplishing meaningful objectives. Mexico’s three-year, non-renewable mayoral terms, for example, have been associated with a very short-term focus in local officials’ governance strategies. In practice, where multiple terms are allowed, three to four year terms are desirable. Where only single terms are permitted, then 5-6 years would be appropriate. The detailed design of authority, powers, accountability systems and procedures must be related to local circumstances, including issues which may range from cultural traditions to the state of accounting and auditing systems. Considerations also include the balance to be struck between preference for room for aggressive leadership versus protecting the community from excesses - this latter choice is a matter of political taste, which is often a consequence of historical experience.