Central-Local 67486 v2 Government Relations in Thailand Improving Service Delivery Thailand Public Financial Management Report 2012 Central-Local Government Relations in Thailand Improving Service Delivery Thailand Public Financial Management Report 2012 ©2012 The World Bank The World Bank 30th Floor, Siam Tower 989 Rama 1 Road, Pathumwan Bangkok 10330, Thailand (66) 0-2686-8300 www.worldbank.org/th This volume is a product of the staff of the World Bank with external contributions. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Report number : 67486-TH Cover Photographer : Chaiwat Subprasom/Reuters TABLE OF CONTENTS Preface 1 Acknowledgements 2 Glossary And Abbreviations 3 Executive Summary 4 Tensions In The Central-Local Relations Architecture 5 Fragmentation 6 Fostering Local Accountability 6 Policy Recommendations For Addressing Identified Issues 7 The Reform Of Central-Local Fiscal Relations In Thailand 9 Introduction 10 Central–Local Relations In Thailand 12 Local Government Organization 25 Own Source Revenues And Tax Sharing 32 Intergovernmental Transfers In Thailand 35 Intergovernmental Transfers In Thailand: An Analysis 41 General Purpose Transfers 41 Specific Purpose Transfers 45 Reforming Intergovernmental Finance In Thailand: Possible Options 47 Local Budgeting And Public Financial Management 53 Local Borrowing 57 Local Public Management 59 Performance Monitoring And Local Accountability 63 Summary : Towards Responsive And Accountable Local Governance In Thailand 66 Annex 1: Summary Of Issues And Options 69 References 72 PREFACE Fifteen years ago, Thailand joined a growing number of countries around the world in reexamining the various roles of different levels of government in providing services, managing public finances and creating mechanisms for citizen voice and accountability. With the enactment of the 1997 Constitution and subsequent 2007 Constitution, Thailand embarked on a series of public sector reforms that would have a profound impact on both the structure of government and the delivery of public services throughout the country. The decision to transition towards a decentralized unitary system of local self-government was undertaken with the goal of strengthening democratic participation, bringing service delivery and decision making closer to the people, addressing regional disparities and enhancing central and local accountability for service delivery performance. Now, after more than a decade of decentralization reforms in Thailand, we have an opportunity to take stock in order to acknowledge the program’s many achievements, identify the challenges which have emerged, provide options for overcoming these issues, and build consensus around key focus areas for Thailand’s service delivery reform program looking ahead. This report reviews how Thailand’s public financial management system supports delivery of effective and accountable public services at the local level. It was undertaken in partnership with the Royal Thai Government for over two years. This partnership has resulted in a body of work which not only serves to provide meaningful insight into Thailand’s public financial management system and service delivery framework, but also to identify current and future challenges and provides options for addressing these issues. Additionally, by presenting the Thai experience to the international community, this report advances the World Bank’s agenda of knowledge sharing and learning from cross-country exchanges. Thailand has made commendable progress in moving towards more efficient, responsive and accountable service delivery at the central and local levels. We believe sharing Thailand’s achievements as well as its challenges will be of great benefit to countries in the region and further abroad. We therefore hope this report will be useful both to inform the ongoing reform program in Thailand, while serving as a resource to policy makers and practitioners at large. Annette Dixon Country Director Thailand, East Asia and Pacific Region The World Bank 01 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 ACKNOWLEDGEMENTS This Public Financial Management Report (PFMR) was prepared by the World Bank in collaboration with the Royal Thai Government. In particular, the team would like to thank key partners in the Office of the National Decentralization Committee, the National Economic and Social Development Board, the Office of the Prime Minister, the Ministry of Finance, the Bureau of Budget, the Comptroller General’s Department, the Fiscal Policy Office, the National Statistic Bureau, the Office of the Civil Service Commission, the Ministries of Public Health and Education, and the Department of Local Administration in the Ministry of Interior. Contributions and collaboration from these departments and agencies are gratefully acknowledged. The World Bank team was led by Shabih Ali Mohib (Senior Economist, EASPR) and included Anwar Shah (Consultant and former Lead Economist, Public Sector Governance, WBI), Jose Cuesta (Senior Economist, PRMPR), Lucia Madrigal (Consultant, PRMPR), Magnus Lindelow (Sector Leader, LCSHD), Nattaporn Triratanasirikul (Consultant, EASPR), Robert Boothe (Consultant, EASPR), Suhas Parandekar (Senior Education Economist, EASHE), and Sutayut Osornprasop (Human Development Specialist, EASHH). Professor Sakon Varanyuwatana from Thammasat University and Mr. Weerachai Chomsakorn from the Office of the National Decentralization Committee also played key roles in planning, developing, revising and disseminating this work. We also recognize the contributions of Ms. Buntarika Sagarun and Ms. Noppakwan Inthapan (team assistants based in Bangkok). The team is grateful for the leadership and support of Annette Dixon (Country Director, EACTF) and Matthew Verghis (Lead Economist, EASPR). They are also thankful for their peer reviewers, Vikram Nehru (former Chief Economist and Sector Director, EASPR), Dena Ringold (Senior Economist, DECWD), and Kaspar Richter (Lead Economist, ECSP3). The team greatly appreciated the opportunity to collaborate with key academic institution, including Thammasat University, Chulalongkorn University, the King Prajadhipok’s Insitute, Chiang Mai University, and the College of Local Administration at Khon Kaen University for their support and partnership. Additionally, the team is grateful to have had the opportunity to engage in a number of different stakeholder consultations with locally elected executives and councilors, local government officials, academicians and civil society members around the country. They are grateful to participants in consultations that took place in the Central region (Bangkok Metropolitan Authority, Nonthaburi Province and Municipality), the Northern region (Chiang Mai Municipality), the Northeastern region (Khon Kaen Municipality, Udon Thani Province and Municipality, Ban Chiang TAO), and the Southern region (Surat Thani Municipality). Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 02 GLOSSARY AND ABBREVIATIONS BMA Bangkok Metropolitan Authority BOB Bureau of the Budget CGD Comptroller General’s Department Bt Thai Baht CGR Consolidated Government Revenues (Total (central + local) pool of revenues) DOLA Department of Local Administration DOPA Department of Provincial Administration e-LAAS Electronic Local Authority Accounting System ESA Educational Service Area GDP Gross Domestic Product GPP Gross Provincial Product LAO Local Administrative Organization LQM Local quality management MBB Municipal Bond Bank MOE Ministry of Education MOI Ministry of the Interior MOPH Ministry of Public Health NDC National Decentralization Committee NESDB National Economic and Social Development Board OCLR Office of Central Local Relations OBEC Office of Basic Education Commission OECD Organization for Economic Cooperation and Development PAO Provincial Administrative Organization PDMA Public Debt Management Act PFMR Public Finance Management Review PMO Prime Minister’s Office RTG Royal Thai Government TAO/SAO Tambon/Sub-district Administrative Organization UNDP United Nations Development Program VAT Value Added Tax 03 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 EXECUTIVE SUMMARY ES.1 This discussion paper1 analyzes the institutional basis of central-local government relations in Thailand and presents policy options to support the Royal Thai Government’s (RTG) on-going review and revision of the legislative and institutional framework governing the decentralization reforms. ES.2 Motivated by a desire to bridge economic and social inequities and increase public participation in the planning and delivery of services at the local level, Thailand established decentralization as a national policy priority under the 1997 Constitution. By moving decision making closer to people, Thailand sought to: (a) increase public participation in decision making at the local level; (b) improve local service delivery by fostering greater bottom up accountability; (c) improve social and economic outcomes for citizens through local economic development; and (d) make public services responsive to local needs. These objectives were laid down in the Decentralization Act 1999 and were to be achieved through the gradual transformation of the intergovernmental fiscal architecture. During the past decade, Thailand has taken a number of important steps to transform the intergovernmental fiscal relations system to achieve these objectives. ES.3 Regional and local authorities in Thailand are now governed by locally-elected councils and executives, subject to significant oversight by centrally-appointed officials. The govern- ment has also assigned about 25 percent of net central government revenues to LAOs. Basic structures for local participation and accountability have also been put in place. A range of responsibilities, especially related to municipal service delivery have been successfully devolved to local authorities. ES.4 However, at this time Thailand’s central-local relations system remains in transition and the objectives and expected outcomes from the decentralization reforms are yet to be fully realized. While a number of important issues have been identified in this Discussion Paper, three broad inter-related themes emerge as key concerns that ought to be resolved in order for Thailand to achieve its stated development objectives from the Decentralization program. These are as follows: • While structures of local governance have been created, the central government has retained a high level of control, leading to tensions within the central-local relations architecture. Ensur- ing seamless integration of different levels of government is necessary for effective service delivery in a unitary state; • Fragmentation within institutions, fiscal management and functions leading to coordination problems and in some instances competitive overlaps in provision of services. It is important that institutions are integrated so that coordination on provision of service delivery can be fostered; and • Lack of effective local accountability because the current tools for performance monitoring and evaluation of local administration finances (e-LAAS) and services delivery (LQM) are not able to provide appropriate information on the application of public finances or service delivery quality or quantity. Availability of information is needed to improve accountability to citizens, local and national legislatures and to central government agencies. 1 Prepared by Anwar Shah, Robert Boothe, Nattaporn Triratanasirikul, Shabih Ali Mohib (World Bank) and Sakon Varanyuwatana (Thammasat University). Invaluable guidance and collaboration was provided by Weerachai Chomsakorn (Office of the National Decentralization Committee, Prime Minister’s Office). Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 04 TENSIONS IN THE CENTRAL-LOCAL RELATIONS ARCHITECTURE ES.5 Government responsibilities in Thailand are divided into central administration, regional administration and local administration. Decentralization reforms focused at strengthening of local administration by giving local authorities a broader mandate in service delivery and access to increased revenues to discharge these responsibilities. ES.6 As a result of these reforms, two parallel systems of public administration have emerged – central and local administration. The central administration has deconcentrated field offices – the so-called “regional administration2”- at provincial (76), district (878) and sub-district (5,770)3 . These offices have a dual role of delivering centrally administered services as well as providing coordination and oversight functions for local administration. ES.7 Local administrative organizations (LAOs) number about 7,8534 , of which 76 Provincial Administrative Organization (PAO) constitute the higher tier of local government. Urban population within each province is demarcated into city (Nakorn), town (Mueng) or sub-district (Tambon) municipalities (2,007) depending on population size, density, level of revenue collected by local authorities and administrative capacity for municipal development. Rural population is assigned to a tambon administrative organization (5,770 TAOs). Additionally, Bangkok Metropolitan Administration (BMA) and Pattaya City exist as special administrative organizations. All LAOs have directly elected local councils, indirectly elected council chairs and directly elected chief executives. ES.8 Regional administrations are managed by provincial governors appointed by the Cabinet with the endorsement by the King. The provincial administrations carry out and supervise the administrative process for the province, supported by the district and sub-district officers at the lower levels. The district officer is the top civil servant position within the district. The head of the sub-district is a civil servant position reporting directly to the district officer. Additionally, the head of district exercises significant de facto control and oversight over the LAOs which lie within her/his jurisdiction, irrespective of these having independent elected councils and executives. Rules and regulations relating to financial management and service delivery standards are determined by the Ministry of the Interior and elaborate compliance checking systems have been set-up to monitor local administrative organization performance. ES.9 So, whereas LAOs have elected councils with significant de-jure mandate, the de-facto management control is vested with officers of the central government. This stifles the concept of local self governance within a unitary state, as top down control trumps bottom up service delivery responsiveness, and increases the feeling of LAO subjugation to the central administration. This tension is further exacerbated by the lack of clearly demarcated service delivery mandates for central and local administrative arms of government.5 2 Comprising central administrations of line agencies and departments under the supervision of deconcentrated field offices. 3 Announced by Department of Provincial Administration as of April 20, 2011 4 Announced by Department of Provincial Administration as of April 20, 2011 5 The Decentralization Act 1999 purposefully assigns overlapping functions to central and local administrations. 05 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 FRAGMENTATION ES.10 Of the 7,853 LAOs, more than 3,000 have populations of less than five thousand people, and many of these have less than one thousand people. The result is that some of these LAOs may be too small to be administratively viable because after accounting for the fixed cost for administration, very small LAOs will have few resources left with which to provide services. The sheer number of LAOs also makes it difficult for DOLA to monitor performance, finances, and coordinate effectively. In addition, it is not economically feasible particularly for smaller LAOs to provide the whole range of 150 plus functions assigned (though in an overlapping manner) by the Decentralization Act. Fragmentation in numbers and overlapping assignment of functions means that central government agencies continue to provide a range of social service delivery including health and education, while LAOs spend their resources on other functions. ES.11 Fragmentation is also present in local public financial management. Intergovernmental transfers as currently constituted provide an incentive for LAOs to fragment, as a sizeable portion of general purpose subsidies is allocated on an equal basis between all LAOs. While local tax and financing autonomy remain highly constrained, each individual LAO can mount their own tax administration for collection irrespective of efficiency considerations. Mandated responsibilities for LAOs are also characterized by fragmentation—a blanket approach has left smaller LAOs allocating minimal resources across a broad spectrum of functions, making it difficult to achieve results. Health and education responsibilities are especially fragmented, with a legal mandate for both local and regional provision by LAOs of all sizes that is unmatched in practice. A number of stumbling blocks have led to only a tiny fraction of health centers and schools being transferred to local authorities. FOSTERING LOCAL ACCOUNTABILITY ES.12 An important component of effective accountability (including at the local level) is a functioning system for tracking local financial management and monitoring local service delivery performance. Managing data such that is collected efficiently, analyzed in a timely fashion, and made available to citizens, policy makers and to LAOs themselves is necessary for effectiveness and accountability of the government. ES.13 In Thailand, significant effort has been placed on data collection and performance monitoring and evaluation. However, these efforts have not yet yielded desired results. The DOLA has been in the process of implementing an electronic Local Authority Accounting System (e-LAAS) for local authorities to use for budget management purposes since 2005. However about 1,200 out 7,853 LAOs are using e-LAAS because of a combination of connectivity, capacity, and enforceability problems. At the same time in order to monitor performance of local authorities a comprehensive review is conducted annually by DOLA but the results are not consolidated or analyzed. Therefore, there is very little is known about local government finances and fiscal health. Even less is known about service delivery outcomes at the local level, as the existing monitoring and evaluation effort is focused largely on ensuring compliance with processes rather than on quality of services and outcomes. Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 06 ES.14 Without information being available on the financial performance of local authorities and corresponding service delivery outcomes in absolute and comparative terms, it is impossible for citizens to hold their respective LAOs accountable for the appropriate use either of public monies or of quality of services provided. Also, lack of functional financial and performance monitoring systems also inhibit the ability of central government, and especially the National Decentralization Committee to determine how effectively the decentralization program is working. Regular collection of information will support other tools to improve accountability such as citizen scorecards and legislative discussions. POLICY RECOMMENDATIONS FOR ADDRESSING IDENTIFIED ISSUES ES.15 As Thailand reviews its decentralization experience and revises the legislative framework, the overarching recommendation is to focus on a comprehensive package of reforms that holistically considers all aspects of the system rather than piece-meal reforms so that all interrelated issues can be addressed to ensure internal consistency between the intergovernmental fiscal relations system and the unitary nature of government. In this spirit the Government’s comprehensive review of the existing laws and regulations governing Decentralization reforms in Thailand is the best way to proceed. ES.16 This Discussion Paper has endeavored to review the system and make recommendations across the entire component-structure of central-local fiscal relations system so that all interrelated issues are captured within the reform net. Some of the key recommendations for consideration by the authorities are: • Consider moving towards a decentralized unitary model of government which would be consistent with the Constitution and strengthen local authorities. Under this model, a centrally appointed governor would assume the position of provincial chief executive for a period of four years. The governor will exercise his executive functions through the Office of the Provincial Administrative Organization (OPAO) comprising merged offices of the provincial administrative organization (PAO) and the provincial administration (PA) and headed by a permanent secretary. The appointment of the governor and the permanent secretary will be done by the Royal Thai Government (RTG) subject to confirmation by a majority of the members of the Provincial Council- provincial legislative body comprising ex-officio directly elected heads of local administrative organizations (LAOs). The governor could also be removed by a no-confidence vote of the three-fourth majority of the Provincial Council. All LAO heads with population above 10,000 would serve for the full term of the council whereas LAOs with population below 10,000 would serve on a rotating basis with one fourth represented in any given year. The Council will elect its own chair. The Provincial Council would have legislative authority on provincial functions and providing oversight on the provincial executive headed by the governor. The provincial governor would prepare the provincial budget for approval by the Provincial Council. All legislation approved by the Provincial Council would have the force of the law unless overturned by an act of national parliament or by courts. LAOs would have wider powers subject to home rule and would be considered equal partners with the PAO comprising Provincial Council and the provincial chief executive (governor). Central transfers would not pass through PAOs or the Ministry of Interior but would flow directly from the Comptroller General’s 07 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 Department of the Ministry of Finance to individual accounts of LAOs. All field offices within provincial administrations would have dual reporting and accountability channels – to the central administration as well as the LAOs. The positions of district and sub-district officers will be realigned and remapped to LAOs. The district officers will transition to municipal coordination officers (MCOs) and sub-district officers will assume the positions of tambon coordination officers (TCOs). The MCO/TCO will serve under the LAO chief executive and will assume the coordinating role with the Center and the PAO and other LAOs. The appointment of MCOs/TCOs by the provincial governor will be subject to confirmation by the LAOs. They will have dual reporting responsibilities i.e. local and provincial governments. This model of government would also help alleviate tensions by clearly defining roles and responsibilities for provincial versus local governments such that they do not inadvertently compete over the same functions. Reviewing and streamlining supervisory controls over local public financial management, local personnel management and local administration will also help to ensure a system that functions more efficiently, subject to the proper checks and balances. • Consider an orderly administrative consolidation of local authorities into larger and more viable LAOs to provide services effectively. In this regard the government may consider determining a threshold in terms of citizens and/or revenue potential that constitutes a ‘viable’ LAO unit administratively and then preannounce gradual administrative amalgamation plans. If this is not feasible, it may be useful to consider asymmetrical decentralization of service delivery responsibility with larger LAOs providing a larger set of services while for smaller LAOs the central government would maintain responsibility for service delivery. This action will deal with issues relating to fragmentation highlighted earlier. • Improve accountability of LAOs on financial management and service delivery quality and responsiveness by: (i) DOLA publishing an annual report on the financial performance of LAOs and services rendered – both by LAO and comparatively for all LAOs (like done in Ontario, Canada, and the UK and Indonesia – mostly fiscal , starting 2012); (ii) mandating LAOs to publish information on procurement for goods and services, especially on a unit cost basis; (iii) implementing instruments like citizen score cards for enhancing voice and accountability to influence the final outcome of a service through meaningful participation or feedback; and (iv) the Office of the Auditor General publishing audit findings from the annual audit of the LAO accounts. However, in order to achieve this, there will be need to ensure that the financial reporting system (currently e-LAAS) is able to report financial information for at least 85 percent of LAOs annually, that the Local Quality Management system captures information on service delivery performance and compliance for all LAOs in a timely manner, and that an audit framework is put in place that allows for audited statements of LAOs to be available annually. Finally, there would also be need for building analytical capacity at the central government and at LAOs to analyze the information and use it for fine-tuning policies as appropriate. Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 08 THE REFORM OF CENTRAL-LOCAL FISCAL RELATIONS IN THAILAND INTRODUCTION 1. Thailand is a unitary democratic country and hospital beds per 1,000 people – see Figures a constitutional monarchy. Until the 1990s, the 1.1 and 1.2). Like many countries experiencing country maintained a centralized unitary structure rapid growth, regional income inequalities also with an emphasis on equality and uniformity developed, as was demonstrated by Thailand of services across the country. Under this ranking (World Bank 2011) among the most centralized regime, Thailand experienced rapid unequal countries in the world. Rising prosperity economic growth and significant improvements and growing literacy also manifested itself in in the living standards of its people. However, mostly peaceful grass-roots movement for the benefits were unevenly shared and goals of enhancing democratic participation and equality and uniformity of public services were empowering people to hold government to not met. Thailand experienced wide regional account. This movement climaxed into an disparities in access to education (measured incident in 1992 known as Black May, with by student-teacher ratio) and health care massive public protests and a subsequent (measured by physicians per 10,000 people and violent crackdown6. Figure 1.1 : Access to education is uneven across Thailand ri Bu 9.0 ng Si 8.0 7.0 6.0 5.0 ri Bu 4.0 ng Si et 3.0 uk et uk Ph Ph 2.0 Techers per 100 students 1.0 (Primry) Techers per 100 students 0.0 (Secondry) Min Avg Max Source : UNDP Human Development Report 2009 Figure 1.2 : Access to basic health varies substantially across the nation ok ay N n or 14.0 ak N 12.0 10.0 8.0 6.0 A BM hu om ap 4.0 m an Lu Ph a n Bu ho 2.0 g ak Physicians per 10,000 on N N 0.0 Hospital beds per 1,000 Min Avg Max Source : UNDP Human Development Report 2009 6 Black May is the name given to the public protests following the attempt of Army General Suchinda Kraprayoon, leader of a military coup which overthrew the previous government, from ignoring demands for elections and instead acting as appointed Prime Minister. In the violent crackdowns which accompanied the protests, some 52 deaths were officially acknowledged, with hundreds of injuries and thousands of arrests. Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 10 2. Recognizing these concerns, the 1997 organization, and citizen-centered local Constitution enshrined the citizens’ rights to governance for local accountability. Article 281 participate in government affairs and identified of the 2007 Constitution asserts home rule by decentralization as a key national priority to stating that “...the State shall give autonomy to make this happen. The 1997 Constitution was local government organizations in accordance followed by the Decentralization Act of 1999 with the principle of self-government based that detailed the decentralization program to be upon the will of the people in the locality.” implemented over the coming years. The 2007 Citizen-centered governance was enshrined by Constitution reaffirmed the vision of Thailand as Article 287 which empowers citizens to oversee “one and indivisible kingdom” with decentralized government operations. Several new pieces governance and sovereign powers resting of legislation to consolidate gains from with the Thai people. The 2007 Constitution decentralization reforms and enhance local strongly embraces the principles of home rule government accountability to citizens are or community governance for local government currently in draft stages. 3. Since 2001, the Royal Thai Government (RTG) subsequently revised to 25 percent in view has been implementing the Decentralization of slow progress made in decentralization of Act. To accomplish this, local governments education and health services, and transfer of have been empowered to assume a greater personnel from central to local administration. role in service delivery, especially education The process of decentralization reform is overseen and health at the local level. To facilitate this by the National Decentralization Committee transformation, the level of access of local in the Prime Minister’s Secretariat, with the governments to net (net of tax sharing transfers Department of Local Administration (DOLA) in to provincial and local governments) central the Ministry of Interior having implementation government revenues was to be raised from coordination responsibilities to ensure a smooth about 11 percent in 1999 to about 35 percent transition of power from central/provincial in 2006. However, in 2009 this target was administration to local administration. 4. This discussion paper presents an analytical target. In addition, the paper outlines pathways perspective on these reforms by identifying to overcome observed impediments to the strengths and weakness of institutional design implementation of the reform agenda. and practice in specific areas which the reforms 5. In subsequent sections the discussion paper presents some policy options for the paper considers the different dimensions of RTG to consider as it reviews and revises the the central-local fiscal relations system and legislative framework governing central-local assesses the strengths and weaknesses of relations. The paper concludes with a summary each dimension. Then based on international of key issues and recommendations. experience and its relevance for Thailand, the 11 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 CENTRAL–LOCAL RELATIONS IN THAILAND 6. Prior to 1999, government responsibilities in (kamnan or district officer) at the subdistrict Thailand were divided into central, provincial and level (by voting among village headmen). local administration. However local administration These offices have a dual role of delivering (local self-government) had a narrow range of centrally administered services as well as responsibilities with constrained autonomy, and providing coordination and oversight functions was subject to strict control through the MOI’s for local administration. For local administration, Department of Local Administration for most Thailand is subdivided into 76 changwat or activities including finance, service provision provinces, which constitute the highest order and local public management. Decentralization of local government. Urban population within reforms have sought to strengthen local each province is demarcated into city, town administration by giving local authorities a or sub-district municipalities (2,007 tessaban) broader mandate in service delivery and depending on population size, density, level access to increased revenues to discharge of revenue collected by local authorities and these responsibilities. As a result of these administrative capaity for municipal development. reforms, two parallel systems of public Rural population is assigned to a tambon administration have emerged – central and local administrative organization (5,770 TAOs/ administration. The government view of these SAOs). All local governments have directly parallel systems is relatively straightforward elected local councils, indirectly elected council in principle (see Figure 2.1). The central chairs and directly elected chief executives. administration has deconcentrated field In Thai local administration there is a clear offices – the so-called “provincial adminis- separation of legislative authority (vested in tration” - at provincial (76), district (878) and the elected Council) and the executive powers subdistrict (5,770) levels and representatives (vested in the elected chief executive). Figure 2.1 : Government Organization in Thailand - de jure - 2010 CENTRAL ADMINISTRATION Ministry of Interior Provincial Dept. of Provincial Dept. of Local BMA and Pattaya City Elected Governor / Governors (76) Administration Administration Mayor & Council Provincial Administration Local Administration Districts PAO (76) (878) Elected CEO & Council Municipalities Sub-districts (city, town, sub-district) (5,770) (2,007) Elected Mayor & Council TAO / SAO Villages (5,770) Elected Head & Council Source : DOLA Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 12 7. However, in practice, the picture of the regional and local level, what emerges is central-local relations is considerably more a very complex system with a confusing mix complex (see Figure 2.2). Taking into account the of accountability and financing dimensions, supervising and financing roles of different resulting in heavy administrative burdens and central governing bodies, line agencies, and duality throughout the system. the deconcentrated central administration at Figure 2.2 : The Practice of Local Administration in Thailand - de facto Line Decentralization MOI BOB Ministry committee budget (2) local staff DOPA grants tax sharing CENTRAL DOLA (on budget) (off budget) ADMINISTRATION governor clerks grants (3) PROVINCIAL & LOCAL district officer ADMINISTRATION Nai Amphoe BMA Province governor Jangwat(76) PAO (76) council (1) chairman (2) council Pattaya BMA District Amphoe(878) (1) Municipality mayor (2,007) council Thessaban funds (2) mayor elects Sub District council controls and supervises Tambon(5,770) dispatch (2) SAO / TAO (1) approves budget, (5,770) personal decisions kamnan Village (2) directly reports to Mooban council (3) reports (4) Member of DC village head Bold = executive Source : Budget in Brief (BOB), Comptroller General’s Department, Fiscal Policy Office, and LAO Survey estimates (World Bank) 8. The provincial administration discussed the activities of lower levels of the local above exists parallel to the local administration administration, implementing Thailand’s or local self-government, but the two systems decentralization program, assessing the do not operate entirely independently of one readiness of local authorities for transferred another. At the upper level of local administrtion, responsibilities, overseeing the allocation of the Ministry of Interior and the Department of funding to local authorities, and evaluating Local Administration within the MOI represent progress in decentralization. The central the highest source of authority. They are administration has a deconcentrated presence responsible for overseeing and regulating at the provincial level. 13 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 9. Provincial governors are appointed by the office; however, in practice they are considered cabinet with the endorsement from his majesty to be government officers under the central the King. Provincial governors exist as administration, and are upwardly accountable representativesof the central administration to the district officer. They must balance at the provincial level, but who also perform representing the needs of their sub-district an oversight function for the local authorities. constituents with overseeing the administration Provincial governors carry out and supervise the of centrally-defined priorities and policies in administrative process for the province, supported their jurisdiction. At the lowest level of the by the district officer at the lower levels. The provincial administration, the village headman district officer is the top civil servant position is another elected official with a five year term. within the district, with the head of sub-district However, like the sub-district headman, the village report directly to him/her. Additionally, the district headman is regarded as an officer of the central officer exercises significant de facto control and administration, and is paid a salary from the oversight over the administration of TAOs or central administration, not local authorities. sub-districts which lie within her/his jurisdiction, The village headman shares a similar role to irrespective of TAOs having independent the sub-district headman in that they must elected councils and executives. The head balance upwards accountability to the central of sub-district is elected directly by villagers administration and downwards accountability in the sub-district for a five-year term of to constituents, albeit on a more localized level. 10. Policymakers continue to refine the provision responsibilities between central, decentralization program to ensure that regional and local governments are not always expenditure assignment is consistent with clear (see annex Table A.1 for constitutional the constitutional mandate and appropriate assignment of functions and annex Table A.2 given levels of revenue devolved to LAOs and on actual allocation of functions among different ‘capacity’ of LAOs to dispatch the more than orders of government). In part this is by design, 150 functions concurrently assigned to them. as Thailand has chosen to engage multiple The “assignment challenge,” or the appropriate orders of government in different aspects of allocation of expenditure and tax functions service delivery, recognizing that even within to various levels of governments, is the specific types of LAOs, a range of capacity most fundamental issue in any decentralized levels exist. In education, local governments country. International good practice literature may assume responsibility for primary and recommends that finance should follow function secondary schools and in health for primary or assigning responsibility for spending must health care and public health promotion. In precede assigning responsibility for taxation, order to assume these responsibilities, however, because tax assignment is generally guided they must meet stringent readiness criteria put by spending requirements at different levels forward by the central administration. Most and cannot be determined in advance. Under local governments have been unable to meet current decentralization reforms, the primary these criteria and as a result the process of focus of expenditure assignment to LAOs has decentralization of health and education has been on municipal services, as well as some proceeded at a snail’s pace with only 160 social programs targeting different groups like out of 7,853 LAOs assuming responsibility the elderly and the disabled. Social services are for primary schooling and only 28 out of 4,000 still envisioned as a shared responsibility, but health centers being devolved to LAOs to-date the lines demarcating the assignment of service (World Bank 2009). Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 14 11. On the revenue side, the focus of 94 percent of consolidated revenues of the decentralization reforms have been on the general government whereas central direct assignment question, attempting to give local expenditures account for 85.7 percent of governments access to a greater share of net consolidated expenditures (see Table 2.1). central government revenues with only modest PAOs can levy taxes on business, hotels, attention paid to strengthening taxing powers petrol stations, liquor, gambling and impose or enhancing local tax autonomy. The 2007 mineral and petroleum royalties, parks and Constitution is silent on tax assignment to recreation fees/charges, underground water various orders of gover nment and tax tax, fishery tax, and taxes on retail sales of assignment is primarily determined by central tobacco. Local authorities below the province legislation. Under the existing legislation, can, following central legislation, levy land and Thailand has continued to maintain a centralized housing taxes, land development tax, local tax regime where almost all productive taxes are development tax, signboard tax, slaughter assigned to the central government. Taxes on tax and swallow bird’s nest duty. In addition, income (personal and corporate), value added, they can collect licensing and other fees external trade, petroleum excises, specific and fines, parking fines and charges. Local business taxes, stamp duties , excise taxes - all tax autonomy remains highly constrained as come within the domain of central government. central legislation typically determines the base These taxes and charges amount to nearly and the rates (or range) for most local taxes. Table 2.1 : Revenue and expenditure shares by level of government – 2009 Government Order Own Revenue Government Order Collection share Central 93.7%* 85.7% BMA 2.4% 2.5% Pattaya City 0.09% 0.1% PAOs 0.6% 1.6% Municipalities 2.0% 4.3% TAO/SAO 1.2% 5.8% *Does not include deficit financing through seignorage Source : CGD 2009 and LAO survey (World Bank) 12. During the past decade, Thailand has comparative perspective. However, beyond transferred a greater share of net central provision of municipal services, there has been revenues to local administration. As Figure a limited transfer of expenditure responsibilities 2.2 shows, in terms of the relative importance to LAOs, especially in education and health. In of local governments (as shown by the local this regard there are several issues that deserve share of consolidated government revenues) further reflection and discussion. Thailand is now well placed in internationally 15 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 Figure 2.3 : A Comparative Perspective of Local Share of Consolidated Government Revenues 0.7 Local share of general government revenues 0.6 0.5 0.4 0.3 0.2 0.1 0 n na k d a 0) es il ce 0) ia do ted az ar si pa an d 01 01 m at an hi ne In m Br ng ni Ja Po C St (2 (2 Fr en Ki U do nd nd d D In te ila ila ni a a U Th Th Source : Boadway and Shah (2009) Figure 2.4 : A Comparative Perspective of Local Share in General Government Expenditures Local share of general government expenditures 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 n na k d a es ce 0) a do ted ar di si pa an 01 m at an hi ne In m ng ni Ja Po C St (2 Fr en Ki U do nd d D In te la ni ai U Th Source : Shah (2006, 2007), Mochida (2008) Issues in central-local relations requiring further attention 13. Coexistence of institutions of centralized government, reduced accountability, lack of control with institutions of local self- attention to regional issues and general tensions government leads to complexity, confusion within the central-local relations system. For and costly administration. While Thailand example, while typically LAOs have the authority on has developed new institutions of local self paper to plan theirbudgets, they are also government, it retains old institutions of required to receive approval for planning and centralized control. In order to promote budget activities from the deconcentrated self-government at the regional level, Thailand provincial administration. This undermines has strengthened LAOs without rolling back local autonomy and creates unclear lines of deconcentrated central administration (the accountability. This has also resulted in an so-called provincial administration). This single uncoordinated, costly dual administration feature of central-local relations has far-reaching at sub-national levels creating coordination consequences for many different aspects of the problems with high transaction costs both for decentralization program, including significantly government officials and citizens. increased cost and complexity of local Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 16 14. This structure is also incompatible with strong provincial governments that assume the constitutional vision of a seamlessly responsibility for local government oversight integrated unitary form of government. in their jurisdictions, but which may prove Options to streamline all gover nment impractical for Thailand; (b) a decentralized operations at the provincial level and create unitary government option where provincial a unified government structure would reduce government simply acts as an agent of local costs and improve central-local coordination. governments to deal with inter-local issues There are many alternatives to accomplish this requiring the least change by drawing on existing but only two relevant alternative scenarios are system components while still effecting a major discussed below: (a) a federation option with reduction of cost, confusion and inefficiency. (a) Federation Option : Under the federation option (see box 2.1), provincial government would comprise a directly elected provincial governor who will act as the chief executive of the province and an elected provincial assembly to perform legislative functions. Local governments would be entities of the province and subject to provincial legislation. Each provincial government would decide for itself the powers it will assume and powers of local government and their jurisdictional boundaries. Under this scenario PAOs assume an autonomous role in each province. The position of a centrally appointed provincial governor, district, sub-district officers will become redundant as the same roles will be assumed by elected chief executives. The field offices of all central agencies within the province will have dual reporting responsibilities – to the centre and the chief executive (directly elected governor). The provincial government will have significant taxing and spending powers. Provincial government will be responsible for provincial infrastructure and most social services and providing fiscal transfers to LAOs. All central and local programs within the province will be coordinated by the chief executive of the provincial government. LAOs will deal with municipal functions and will be subject to provincial oversight. All central transfers to LAOs will pass through the provincial government. Adoption of this model will result in strong provincial governments and relatively weak local governments. There will be a shift in the public decision making from the centre to the provinces. If Thai people largely identify themselves with their provinces rather than cities, towns and villages, this model may be more appropriate. Also if the provincial boundaries are synonymous with economic regions then it could be helpful in better economic planning. This option has been practiced in India, Pakistan, Russia, Canada, USA and other “federal” countries. However, this model also poses some risks and is not consistent with the vision of a seamlessly integrated unitary government. If there are significant differences in ethnic, linguistic or religious composition across provinces, or if significant gaps exist in income or political power, empowerment of provinces as opposed to local government exacerbates potentials for conflict and demands for secession. Experiences of Canada, India, Pakistan, Russia, Sudan, Indonesia and Malaysia support this argument. This may be the reason that Indonesia in its 2001 decentralization program sought to weaken the role of the provinces and strengthen the role of local governments. China has also followed a similar policy consistently. This model may not be a feasible option in Thailand as it negates the constitutional dictum of decentralized unitary state 17 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 CENTRAL ADMINISTRATION Box 2.1: Federalism Option Key Features : Strong, Autonomous Provincial Government • Strong, autonomous provincial government as Directly Elected Provincial Governor and partner with central government, weaker LAOs Members of Provincial Assembly • Elected Governor as CEO and Members of Provincial Assembly Local Administration • All central and local programs within province coordinated by CEO, all fiscal transfers to LAOs pass through PAO Municipalities Pattaya (city, town, sub-district) TAO/SAO (5,770) BMA Issues : City (2,007) Elected Council • Inconsistent with unitary vision in constitution Elected Council • Strong provincial governments can mean potential for conflict, demand for secession, Central Central Local Local line-agency line-agency as in Malaysia, Canada, India, Pakistan Executive Executive officials officials (b) Decentralized unitary government. This option provides a shorter-term compromise that alleviates some of the problems of the current dual administration without requiring radical changes such as the creation of new bodies or positions, or the elimination of old ones. Under this option (see box 2.2), a centrally appointed governor would assume the position of provincial chief executive for a period of four years. The appointment of the governor would, however, require confirmation by a majority of the members of the provincial council. The governor could also be removed by a no-confidence vote of the three-fourth majority of the Provincial Council. He/she would be supported by a permanent secretary appointed by the Provincial Council. Provincial Council would comprise the elected heads of LAOs in the province and the chair of the council would be indirectly elected by the members of the Provincial Council. All LAO heads with population above 10,000 would serve for the full term of the council whereas LAOs with population below 10,000 would serve on a rotating basis with one fourth represented in any given year. The Provincial Council would have legislative authority over regional functions and providing oversight on the provincial executive headed by the governor. The provincial governor would prepare the provincial budget for approval by the Provincial Council. All legislation approved by the Provincial Council would have the force of the law unless overturned by an act of national parliament or by courts. Local authorities (LAOs) would have wider powers subject to home rule and will be considered equal partners with the PAO comprising provincial council and the provincial executive. Central transfers will not pass through PAOs or the Ministry of Interior but will flow directly from the Comptroller General’s Department of the Ministry of Finance to individual accounts of local governments. All field offices central line agencies would be integrated with PAOs and LAOs and will have dual reporting and accountability channels – to the central administration as well as the LAOs. In this regard, the Department of Provincial Administration (DOPA) at the Center and area-based bodies continue to exist, but are meant to assist rather than solely regulate LAOs. Positions within the deconcentrated central administration, such as the district and sub-district officers will transition to municipal/tambon coordinting officers, will continue to be appointed by RTG, but would be subject to confirmation and annual review by elected bodies of the LAOs, with the option to recommend on transferring officials elsewhere, subject to a three-fourths majority vote. The LAO chief executive would play a growing role in coordinating with the Center and the PAO and other LAOs. Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 18 CENTRAL ADMINISTRATION Box 2.2 : Decentralized Unitary Option Office of Central Local Relations Key Features : • Weaker regional, strong local government, consistent with unitary system • Centrally appointed Governor as Provincial Provincial Governor Provincial Council Executive with 4 year term, confirmed by (Subject to confirmation (Ex-Officio heads of LAOs) by Provincial Council) majority of members of Council • Council as Provincial Legislative composed of elected executives of LAOs—LAOs w populations >10,000 serve full term, Municipalities Municipal <10,000 serve ¼ term on rotating basis Elected Mayor Coordination Officer Elected Council (formerly District officer) • Central transfers flow directly from MOF to LAOs, central field offices report to both Central and Local authorities • Provincial Administration retained but TAO TAO appointed positions subject to confirmation Elected CEO Coordination Officer by LAOs, accountable to LAOs through Clected Council (formerly Sub-District officer) annual reviews Table 2.2 : Current and proposed structure of central-local relations LEGISLATIVE EXECUTIVE Order CURRENT PROPOSED CURRENT PROPOSED CENTER House No change Prime Minister Prime Minister-no change (Directly elected) (Indirectly elected) Proposed new Office of Senate (Appointed) Central-Local Relations PROVINCE PAO Provincial Council (comprising Provincial Governor Provincial Governor (appointed ex-officio heads of LAOs) PAO Chief Executive subject to confirmation by Provincial Council) DISTRICT N/A N/A District Officer N/A MUNICIPALITY Municipal Council No change Mayor Mayor-no change District officer transitions to municipal coordination officer TAO TAO Council No change Sub-district Officer TAO CEO-no change TAO Chief Executive Sub-district officer transitions to TAO coordination officer This option represents a move towards the constitutional dictums of a unitary state with home rule and citizen-centered accountability. It will also likely to lead to substantial savings in administration costs and lead to a seamlessly integrated unitary government. An important merit of this option is the coordinating forum it creates at the provincial level for all government operations. In the medium- to longer-term, as LAOs demonstrate increasing capacity and appropriate accountability mechanisms are in place, this model can also transition towards a fully unitary approach, where the area-based bodies of the deconcentrated central administration are phased out. This fully unitary model is successfully practiced in a number of decentralized countries, including South Africa and Chile. 19 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 15. Actual authority for the central delivery of of central agencies in their service delivery services at the local level has been retained by responsibilities in a local area. Such oversight central government; local governments have is only possible when either the central limited information and authority over how government operations are integrated with service delivery takes place locally. Thailand local operations or there is a high degree of has already gone a long distance in empowering coordination. Both conditions are non-existent local authorities and giving them greater at present. A decentralized unitary governance spending responsibilities while following option outlined earlier can help overcome central mandates. The area that has not these concerns. received sufficient attention is the oversight 16. Ambiguity in the respective roles of governance. The status of the Office of the institutions of central-local coordination National Decentralization Committee at the contributes to slower progress in building Prime Minister’s Permanent Secretary Office capacity at the local level. As noted earlier may be upgraded to an Office of Central- two central institutions – DOLA and the Local Relations (OCLR) in the Prime Minister National Decentralization Committee7 (NDC) Office. This office will serve as a one stop play somewhat overlapping roles in central- shop on all central-local relations matters and local coordination. The NDC is entrusted with would coordinate central responses to LAOs overall implementation responsibility for the concerns. It will serve as a secretariat for the decentralization program. It also is responsible Central-Local Commision that sets policies for for design and allocation of central transfers and local government organization and finance. oversight of local governments. Implementation It will provide analytical and policy support to and monitoring of the policies established by the Commission and the Central Cabinet on all the NDC is vested with DOLA. This entails policies affecting LAOs. It will also coordinate appointments and transfer of personnel, with central (Ministry of Finance, Bureau of decisions on local government status and the Budget, Ministry of Interior) and all line annexation and amalgamation issues, oversight agencies central government policies and of LAO administration, review of financial and programs for LAOs. It may also be entrusted with service delivery operations at the local level responsibility for developing a comprehensive and acting as a custodian of LAO reserve fund. database that links all central and local It also administers grants and monitors data bases on organizational, financial local government financial and operational and operational performance of all LAOs. performance. Under a vision of decentralized DOLA may consider adapting to a more local governance, their respective roles specialized role of a facilitator or enabler as require re-examination to improve central-local opposed to its traditional role of a manager. coordination and a place greater emphasis This recommendation is consistent with the on strengthening capacity for local self- development experience of Japan and France governance. Their roles ought to be revised (see Box 2.3 for similar transformation in UK, in line with the vision of decentralized local Japan and France). 7 NDC is chaired by the Prime Minister and comprises of Ministers for line and sector agencies. The Office of the Decentralization Committee (division level) provides the Secretariat to the NDC. d b Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 20 Box 2.3 Adapting the Role of the Central Oversight Agency to Decentralized Local Governance – The Experiences of France, Japan and the UK Several industrial countries have attempted to reshape the role of their central agencies responsible for oversight over local government to conform to the new paradigm of decentralized local governance – some of these attempts were successful whereas others failed. In France, the role of the Ministry of Interior transitioned gradually over two decades from one of control, tutelage and active management of local governments, which were perceived to be incapable of self-administration, to one of coordination, oversight and providing a regulatory framework around which partnerships could be built. The institutional density which arose during decentralization has resulted in a demand for a strong coordinating and oversight body, which the Ministry of Interior has been able to fill. While their role remains important, it also respects the high degree of autonomy that local governments possess in fiscal and administrative matters. In Japan, the role of the Ministry of Interior has also changed dramatically over the period of decentralization. Prior to and in the early years of decentralization, the central administration exercised strong control over local governments, to the extent that locally elected executives were required by law to act as agents of the central government and could be dismissed for failing to do so. However, over the past decade, reforms have begun to eliminate this and other controls that undermine local autonomy, and have begun to restore some balance to the intergovernmental relationship, moving away from command and control and towards a partnership approach. In addition, the Ministry of Interior was transformed into the Ministry of Home Affairs, and later entrusted with other functions to form the Ministry of Internal Affairs and Communication. Their role has transitioned from one of control to one of fiscal supervision and more importantly, representing local governments interests within the central administration and protecting local government finances from other competing central ministries. In this way, the interests of the local governments and the Ministry have become much better aligned. In the United Kingdom, the past several decades have actually seen a reduction in local autonomy through a number of channels. The Home Office has attempted to resume tighter fiscal controls over local governments, who are already confined by the ultra vires doctrine which prohibits local governments from taking on additional responsibilities other than those expressly permitted by law. Furthermore, while local executives are elected, many local officials are still appointed by the Home Office, which also sets cross-cutting personnel management regulations for local governments throughout the UK. Finally, the Home Office exerts strong regulatory and supervisory control over the quality of service provision, to the extent that they can reduce funding to local governments who they deem to be performing poorly. Thus, the United Kingdom represents the opposite end of the spectrum, where the central administration through the Home Office has tightened controls over local government and reduced local autonomy. Source : Prud’homme (2006), Jun and Moto (1998), Mochida (2008), King (2006), Cole (2006). Thoeing (2005) 17. Expenditure assignment reflects that authorities based on capacity of LAOs to Thailand’s system is in transition, with many assume such responsibility. Currently, Local responsibilities gradually shifting away authorities account for approximately from central government and towards local 15 percent of consolidated government 21 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 expenditures, spanning a wide variety of different local authorities. However, especially functions ranging from municipal services within different orders of LAOs, clarifying to health and education to social programs expenditure assignment constitutes an targeting the elderly and disabled. However, important objective. While LAOs of different more clarity is needed in the lines demarcating orders have a theoretical mandate to exercise spending responsibilities within different choice in the type and levels of public services orders of LAOs, especially with respect to the they provide, it makes less sense for a TAO to provision of social services, where a lack of clear attempt to provide secondary health care than understanding and overlaps can lead to a large municipality or PAO. Clarification is inefficiencies and drive up coordination costs. also necessary in order to evaluate the As currently constituted, service provision appropriateness of revenue assignment to responsibilities are shared, and financing also local government. The share of LAOs from comes from multiple sources. For example, for net central government revenue has been education, different central agencies provide adjusted a number of times to reflect changes some share of financing, while transfers are in the understanding of LAO service provision also made to local governments to support responsibilities, especially in health and education programs-additionally, LAOs may education. Clearly establishing the assignment supplement this with own-source revenues of spending responsibilities for various orders allocated towards different components of of government will also enable policymakers education. This is partly by design, as the RTG to determine the appropriateness of revenue recognizes the wide range of capacity levels for assignment. 18. Given the clearly stated constitutional credibility of the entire decentralization program dictum to decentralize service delivery, as education and health decentralization was lack of progress in primary education and a major component of this reform agenda. public health center decentralization poses Both the reasons for this lack of progress and significant risks for credibility of the possible options to help overcome these decentralization program. As noted earlier roadblocks are discussed in the following decentralization programs in education and paragraphs. health are stalled. This undermines the 19. Public health center decentralization. Health has no incentives to expedite this A lack of progress in devolving public health process as they stand to lose personnel and more centers and health promotion to local importantly budget. Third, local authorities have government can be attributed to a number limited incentive to take control of these centers of factors. First, the readiness criteria include as they have no assurance of receiving full stringent requirements regarding capacity and financing from the central budget. With performance which most LAOs find it difficult these hurdles, it seems clear that the health to meet. Especially difficult to satisfy is the decentralization agenda is unlikely to be requirement that a majority of health center staff completed in the foreseeable future. Maintaining must agree for a transfer from central to local the credibility of the decentralization reform administration as most health professionals agenda suggests that it is important for the perceive a transfer to local government as a Government of Thailand to rethink its options demotion. Second, the central Ministry of for feasible reforms. Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 22 20. Both conceptually and empirically, health direct accountability, may lead to improvements decentralization to LAOs is neither necessary in performance in some dimensions. France nor sufficient for improving quality and access has accomplished improved healthcare at the to basic healthcare especially given that the local level through a centralized regime rationale and the need for central financing whereas Brazil, Canada, Denmark, Finland and would still remain paramount. Local government Sweden has accomplished the same through involvement is mainly advocated to tailor these decentralized regimes. facilities to local needs as local participation and Box 2.4: Healthcare in International Comparative Perspective In Poland, healthcare has moved from a highly centralized system in the past towards a model of devolved responsibility for healthcare provision and management. Prior to the 1990s, public health care centers were administered and financed by the central government under the Ministry of Health. In 1991, the Health Care Institutions Act allowed for the ownership of healthcare organizations by different bodies including central, provincial and local authorities, the non-profit sector, and private-for profit ownership, with the latter two being required to meet basic technical standards to ensure quality of service. Expenses for private care were typically paid out of pocket. In 1992, financing of healthcare was taken over by the Ministry of Finance under the National Health Fund (NHF)—this fund manages general (universal) healthcare contributions. In 1995, the Ministry of Health issued a regulation on conditions of the transfer of budgetary resources to self-managing health institutions, giving them the power to manage their own budgets. As currently constituted, management of health services remains largely vested with sub-national units, with local units largely responsible for primary care and regional units more commonly involved with the provision of secondary care-thus management of health care provision takes place at all tiers of sub-national government with varying responsibilities. These units receive grants from the central government as well as raising their own taxes to finance health programs. The central government remains responsible for national health policy, implementing health programs, training personnel, funding medical equipment and monitoring provision as well as maintaining financing for the healthcare scheme under the NHF. Healthcare in Sweden has a long history of decentralized management dating back to the 1860s, when regional political units were given the responsibility for operating hospitals in the country. Planning, provision and financing of healthcare services were among the responsibilities gradually taken on by regional or ‘county’ bodies. In 1955, Sweden introduced a policy of national public health insurance obliging all such regional bodies to provide health services at heavily subsidized costs. In later years, health ‘districts’, which are typically responsible for primary care provision, have taken on increasing autonomy especially for resource allocation within their geographic jurisdiction. As currently constituted, responsibility for managing and financing both primary and secondary health care provision is vested in the county-level of government, which typically each administer at least one major hospital and a number of smaller primary care units (divided into health districts). Financing comes mostly through county taxes with additional resources from state grants and user fees. Hospitals are managed directly by elected county politicians and their staff of civil servants. Provision is overwhelmingly public, with a small percentage of primary care provision (5-10 percent) administered by private organizations. 23 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 In contrast to the decentralized models of healthcare provision presented above, the French model of healthcare provision can be thought of as State-led managed care, under which the central government maintains the primary role of financing, and a significant role in provision and management. This system is viewed by the French as a realistic comprise between the UK’s National Health Scheme, which they believe requires excessive rationing and offers insufficient choice, and the American model, which presents tremendous choice but fails to ensure widespread access to services. Under the French system, healthcare provision is financed by the compulsory National Health Insurance scheme. While in principle NHI funds private organizations responsible for the provision of a public service, in practice they are quasi-public organizations overseen by the government agency responsible for social security. The French healthcare provision landscape comprises a mix of private solo offices, private group practices, occupational health services and large public providers, affording a variety of choices for consumers. Ambulatory care is dominated by private solo offices, while hospital care is dominated by large public hospitals managed by the Ministry of Health and its regional agencies. Local governments play little role in the management, provision or financing of health services under public organizations. Thus, a system emerges which preserves the right of patients to choose physicians, the right of physicians to practice how and what they chose, and direct payment to physicians by patients, the majority of which expenses are then reimbursed under the universal health scheme. This system can be characterized as a bilateral monopoly whereby physician associations accept the monopsony power of the NHI system in return for the state’s sanctioning of their monopoly power. Source : Saltman et al. 2007, Rodwin 2003, Rodwin and Le Pen 2004 21. Given that Thailand has opted for a Care (UC) scheme of healthcare financing while decentralized public health system, it has many decentralizing only service provision to the local alternative options to achieve this. First, taking level. It is important to distinguish between the a radical view, Thailand could transfer control decentralization of service provision and the and financing of all existing health centers to corresponding financing mechanism-further LAOs and give health professionals an option discussion will likely be necessary to determine to be assigned to a surplus pool if they choose the appropriate instrument. However, any not to transfer. This move will be resisted by financing mechanism should be subject to health professionals, could cause significant appropriate controls to ensure basic minimum disruption in delivery of services, and therefore standards are met (see the transfers section for may not be practical. A second alternative is an more details). All urban local authorities below asymmetric approach to public health center this size, on the other hand, would remain part of decentralization where urban municipalities the centralized system until they could assume with population in excess of 50,000 be given such responsibility by meeting the existing an option to establish direct management and readiness criteria as specified by the Ministry control over local health center, contract it out of Public Health (MOPH). For TAOs/SAOs, the to private sector or do it in partnership with a decentralized system would not be an option neighboring municipality (as done in Finland) or and central government would continue remain part of a centralized network. For those to maintain centralized provision with LAO choosing to exercise this option of local control, oversight. In smaller municipalities and TAOs some different financing mechanisms be made and SAOs, public health centers run by the available, such as receiving central health grants central government would have oversight based upon service population. Alternatively, committees constituted by local authorities. Thailand could maintain the existing Universal Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 24 22. Primary school decentralization. Three happened to any significant level - there kinds of reforms have been implemented in are various explanations for the limited Thailand with varying degrees of success: implementation of the first reform thrust. These transferring ownership of schools to LAOs; include reluctance on the part of the MOE which devolving aspects of administration to local units needs to authorize the transfer, reluctance on of the central ministry of education; and school the part of teachers who prefer to remain central based management. The transfer of schools government employees, and lukewarm demand to local administrative organizations has not at the grassroots level. 23. Educational Service Areas (ESAs): There of Basic Education Commission (OBEC) to are 175 Educational Service Areas in Thailand carry out their mandate of administration and which are deconcentrated offices working management of the school system. Scholars closely with local government office and of educational decentralization in Thailand responsible for supervising the day to day appear to have overlooked the low-hanging management of schools at the sub-provincial fruit of benefits of decentralization to be found level. ESA’s are well staffed in general and they in shape of the ESAs. receive funding from the central level’s Office 24. School Level Autonomy: The third and and school authorities to agree to transfers most successful part of the decentralization from the MOE to local government. Local reforms concerns the financial, administrative government authorities could perceive and pedagogical autonomy provided to schools. themselves to be closer to the context and The considerable level of autonomy enjoyed population and may not devolve more power at the school level shows a deepening trend to schools. The effect of this autonomy on since the reforms began. The increasing level educational performance is an issue that of autonomy across time at the school level requires a systematic investigation. would also explain the reluctance of teachers LOCAL GOVERNMENT ORGANIZATION 25. Local self-government is officially termed as are required to have a local council, a chief local administration in Thailand and comprises executive and a chief administrative officer. of two tiers: province and sub-province local All local government council members and authorities which includes six types of legal the chief executives are directly elected by entities: (i)special administrative areas (Bangkok local residents for a four year term. All chief Metropolitan Administration and Pattaya City administrative officers are appointed by relevant only), (ii)provincial administrative organization, chief executives in accordance to the criteria set (iii) city, (iv) town, and (v) sub-districts by respective PAO, municipality or TAO local municipalities, and (vii) tambon administrative personnel committees. organizations (TAOs). All local governments 25 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 26. An interesting feature of Thailand local This is a laudable feature of the Thai system administration is that, at all tiers, there is a as several studies in the USA have shown separation of the executive power from the that local governments with separation of legislative functions. The executive power is powers are more efficiently run than those exercised by a directly elected chief executive with a council that combines executive and and the legislative and oversight functions legislative functions (see Inman, 2006). are the domain of a directly elected council. 27. Local government in Thailand is Thailand, China has only 5 times the number characterized by a large number of individual of local governments; furthermore, the average units, the distribution of which is skewed population for a local government in China is towards both smaller populations and areas. approximately 100,000, compared with Tables 3.2 and 3.3 provide some indication Thailand’s approximately 8,000. Poland, Japan, of where Thailand falls relative to other Indonesia and Denmark all have much lower decentralized countries. For example, we numbers of local governments than Thailand. see that at almost 20 times the population of Table 3.1 : Number and characteristics of LAOs FY 2007 FY 2008 FY 2009 Number Population Type of LAO Min Avg Max BMA/Pattaya City 2 104,318 2,881,636 5,658,953 PAO 75 182,729 769,061 2,565,117 City Municipality 24 50,000 99,922 264,245 Town Municipality 142 4,448 26,854 77,976 Sub-district Municipality 1,841 288 6,870 104,922 TAO 5,770 376 6,321 52,795 Source : Department of Local Administration, Ministry of Interior (2010) Table 3.2 : Size distribution of local governments comparative perspective FY 2007 Denmark China FranceFY 2008 Indonesia Japan FY 2009 Poland Thailand United States Number of inhabitants (2004) (2002) (1999) (1990) (2000) (2003) (2009) (2002) 0-4,9999 43,258 134 35,758 1,237 1,577 604 3,055 32,070 5,000-9,999 i i i 62 i 1,049 3,678 i 10,000-19,999 i 125 802 i 1,220 731 865 3,125 20,000-24,999 i i i i i i 143 i 25,000-49,999 i i i 7 i i i i 50,000-99,999 i 12 82 i 224 54 26 461 100,000-199,999 i 3 32 6 206 22 8 219 200,000-499,999 374 i i i i 13 2 i 500,000-999,999 283 1 3 i 11 5 0 22 1,000,000 or more 50 0 2 i 12 i 1 9 Total number local governments 43,965 275 36,679 1,312 3,230 2,478 7,778 35,906 Note : An arrow indicates that the value is an aggregate and covers the range included Source : Shah (2006, 2007) Table 3.3 : Average population per local authority comparative perspective FY 2007 FY 2008 FY 2009 Country Average population per local authority France 2,068 Indonesia 5,915 Thailand 8,014 Poland 18,881 India, urban 68,027 UK 106,904 China 107,334 Source : Shah 2006, UK Gov 2008 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 26 28. Special Administrative Areas: Bangkok elected by proportional representation and a Metropolitan Area (BMA) and Pattaya City. directly elected chief executive (governor) – both These two jurisdictions are considered unique for four year terms. BMA is further divided into - Bangkok due its large size and cosmopolitan 50 districts for administration of local services. nature and Pattaya City because of its need to Each district has its own council comprising develop local economy based upon tourism - directly elected representatives and a district and have been given greater autonomy than officer (chief executive) appointed by the most LAOs under special legislation. BMA is Governor of BMA. governed by a legislative council that is directly 29. Provincial Administrative Organizations body, the so-called Provincial Council, which (PAOs). Provincial Administrative Organizations was comprised of selected officials posted (PAOs) are the higher tier of the local in the province. Local demands for greater administration in provincial area. There are 76 political participation led to the enactment of provinces or changwat in Thailand (excluding the Administrative Organization Act of 1955 Bangkok, which has quasi-provincial special which required local oversight on central administrative status) ranging in population operations managed by the centrally appointed from 178,000 to 2,546,000 and ranging in size provincial governor through a directly elected from 416 km2 to 20,494 km2. The PAOs origin council. Subsequently, the 1997 PAO act made dates back to 1933 when the country was PAOs an autonomous tier of local administration administratively divided into provinces and with directly elected council and a directly headed by the centrally appointed governor. elected chief executive. The governor was guided by an advisory 30. Municipalities. Urban areas are designated with an average size of 100,000 people, with as (a) city municipality if population size is populations ranging between 50,000-264,000. greater than 50,000, area has a good economic There are 142 town municipalities with an and social development potential and the average size of 27,000 people and population jurisdiction has sufficient local revenues to range of 4,000-78,000. There are also 1,841 discharge responsibilities under the Municipality sub-district municipalities with an average size act; (b) town municipality, if population exceeds of 6,900 people and the population range of 10,00 and the jurisdiction has sufficient local 288-105,000. This suggests that there are revenues to discharge town functions; and (c) a number of municipalities that do not meet sub-district municipality if it has more than 7000 the formal criteria but have been granted the people and local revenues exceed 12 million municipal status. baht. At present there are 24 city municipalities 31. Tambon Administrative Organization tambons throughout Thailand, with an average (TAOs). Rural areas are organized into Tambon population size of 6,000 people and a (sub-district) Administrative Organization or population range of 375-53,000. TAOs. To date there are approximately 5,770 27 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 Responsibilities of Local Administrative Organizations in Thailand 32. Prior to Thailand’s push towards budgets. Central government line ministries decentralization, local governments had played an active role in administration and limited autonomy and simply delivered service provision at the local level, while the services financed and mandated by the central role of local authorities was largely confined to government. Local authority expenditures a limited number of municipal functions such re p re s e n t e d l e s s t h a n 1 0 p e rc e n t o f as street cleaning, waste disposal, holding consolidated government expenditures and markets and fairs. The Decentralization Act the ratio of local personnel to central personnel of 1999 therefore represented a marked shift was extremely low (Nagai et. al 2008). Central from the past duties of local authorities. The g o v e r n m e n t w a s re s p o n s i b l e f o r t h e Act mandated the transfer of responsibilities appointment of local chiefs, determining local primarily across six different functional areas. salaries and approving or amending local These include: • Public infrastructure investment (87 programs); • Improvement of Quality of Life (103 programs); • Order, and Security of Communities and Society (17 programs); • Planning, Local Investment Promotion, Commerce and Tourism (19 programs); • Conservation and Management of Natural Resources and Environment (17 programs); • Local Culture, Tradition, and Local Wisdom (2 programs). 33. The Decentralization Act also mandated that minimum standards of service quality transfer of primary education and basic health are met and maintained. To this extent, the (public health center) responsibilities from process of transferring responsibilities to local central to local administration. However, the authorities has been graduated, with fiscal and de facto responsibilities undertaken by LAOs administrative assessment indicators used depend very much on DOLA’s view of the to determine the readiness and capacity of absorptive capacities of different types of specific local authorities to take on local authorities as well as the mechanisms decentralized responsibilities. that each government has in place to ensure 34. As noted earlier, Thailand has successfully yet significant further refinements would help transferred most municipal functions to local provide a clear demarcation of responsibilities and jurisdictions whereas progress on the transfer accountabilities of various tiers. The following of basic social service responsibilities has paragraphs highlight areas requiring immediate been restricted. Thailand also has a well attention for further reform. structured system of local government tiers, Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 28 Outstanding issues in reforming the organization and structure of local government 35. Local administrations at the provicial with inter-local issues and services. In Thailand, level (PAOs) increasingly deliver local regional governments (PAOs) are autonomous functions to the relative neglect of their directly elected units and are assured primary role of coordinating and delivering significant financing. As a result they are regional services. The PAOs were created increasingly assuming direct service provision to deal with regional functions, with primary roles in education and health, competing with responsibilities including creating local local and central service provision. Such direct development plans, coordinating and enhancing provision role distracts them from focusing LAOs within their jurisdictions (Decentralization on interjurisdictional issues and dealing with Act 1999) and to deliver local services only if interregional infrastructure and inter-local the lower level LAOs were unable and they were spillovers. This also limits the financing available requested to do so (DOLA 2009, DOLA 2007). to local authorities to meet critical local needs. In practice, however, they are increasingly In view of this, it may be important to rethink delivering local services at the cost of dealing the role of PAOs. 36. The role of a provincial government in a with inter-municipal issues. Finland represents federal country is quite obvious as the federal an important exception as it does not have system of government typically treats provinces intermediate order governments and regional as partners in a federation but local authorities functions are delivered through partnership as creatures of provincial government. In a agreements among local governments. In unitary system of government, however, the Thailand, local administration at the provincial role of self-government at the provincial level is level (PAOs) are expected to perform a dual less clear especially when central government role in coordinating central-local and inter- has parallel provincial level administration. In jurisdictional relations at the regional levels as fact, provincial self government can be a source well as pooling resources to develop regional of conflict rather than harmony. For example, infrastructure and dealing with inter-jurisdictional it is for this reason that Indonesia’s 2000 conflicts. Such a role is best handled by creating Decentralization Act sought to limit the powers an upper tier government comprising elected of provincial governments while expanding chief executives of local authorities in the the roles of local authorities. Similarly in China, province. In view of this, consideration may be provinces play a relatively insignificant role given to restructuring local self-government compared to local governments. In both federal (PAOs) at the provincial levels to better target and unitary countries, the role of provincial coordination objectives while also creating (regional) government is quite important in a seamless integration with the central delivery of regional services as well as dealing government operations at the provincial level. 29 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 37. Unitary governance structure for environmental protection and metropolitan Bangkok Metropolitan Authority limits parks. Such arrangements exist in Seoul, South voice and choice options for local residents. Korea, Melbourne Australia, Vancouver, Canada Bangkok is a large metropolitan area with a and Stockholm, Sweden. The experience service population of 6 million and a service area of Seoul (with a population of 12 million) is of 7,761.50 km2. It is governed by a directly particularly relevant as it had a unitary structure elected council and a directly elected mayor. and administrative districts similar to Bangkok till For administrative purposes, BMA is currently the 1980s. By instituting local self government divided into 50 districts, each with its own at the district level (25 gu/districts with district council – a directly elected advisory population range of 140,000 to 630,000 and body to oversee the work of district officer, area range from 10 to 47 square km) and who remains an appointed official. This system making them autonomous in municipal functions, has served Bangkok residents well, and the it experienced enhanced participation in civic city is largely well run. However, given the large affairs as well as improved delivery of municipal size (population in excess of 6 million) political services. If Bangkok were to consider a two participation could be enhanced and further tier structure then it could be subdivided improvements in municipal services such as into 12 lower tier municipalities comprising street cleaning, garbage collection, sidewalk about 500,000 residents each. These city maintenance etc. may be possible. The BMA municipalities would have directly elected could do so by devolving municipal functions mayors and council members and would (e.g. fire protection, refuse collection, be autonomous in municipal functions. The neighborhood parks and recreation, street metropolitan government (BMA) would assume cleaning and maintenance, local libraries regional functions and would have a directly etc) to a district government while retaining elected governor as the chief executive and the metropolitan wide functions such as land use council membership would comprise ex-officio planning, transportation, water and sewer municipal mayors from lower tier municipalities. and refuse disposal, metropolitan planning, Such a system of metropolitan government is education, health (public health and hospitals) expected to enhance voice and choice options and social welfare, police protection, utilities, for metropolitan residents. Table 3.4 : Metropolitan governance: a comparative perspective FY 2007 Bangkok Seoul FY 2008 Melbourne FY 2009 Vancouver Stockholm Number of inhabitants Population (millions) 6 12 3 2 2 Lower tier municipalities None. 25 57 18 25 (50 administrtive districts) Hospital, utilities Metropolitan All local funtions Health and welfare, Water and sewer Hospital, utilities (water, sewer, gas, / Regional government environment, (water, sewer, gas, electricity), functions (upper tier) transportation, air electricity), transportation quality, culture, transportation housing, planning, fire and disaster management, balanced development All municipal Municipal functions None –only All municipal Recreation, culture, All municipal functions (lower tier) advisory role at functions roads, functions district level Waste collection and disposal Source : KRILA (2010), McMillan (1995) Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 29 38. Local authorities are numerous, small local government units including townships. In and fragmented with inadequate capacity developed countries the average size of local to deliver local services. Thailand’s effort government usually falls in the range of 10,000 to ensure that each local jurisdiction has the to 30,000 population range. A minimum size opportunity to exercise some degree of control of 10,000 is considered essential to deliver a over its own affairs is commendable. However, range of local services and effective in political it may be useful to reconsider the number and representation. Most TAOs in Thailand fall size of units of local authorities in Thailand. below this threshold; in terms of average Currently, there are a total of 7,853 units of local local government size, Thailand falls among government, including 2,007 municipalities and governments with the smallest population size 5,770 TAOs for a country with a population of local government such a France (see Figure of 66 million. Most sub-district governments 3.1). The small size and deficient revenue base have a small area, small population size (3,055 can put TAOs at risk of spreading resources too LAOs with less than 5,000 people and 6,733 thinly, trying to accomplish too wide a range of LAOs with less than 10,000 people) almost mandates and being unable to devote sufficient non-existent tax base but costly council and resources to maintain quality or perform well. bureaucracy and a wide range of service delivery For example, Ban Chiang TAO spends annually responsibilities. In contrast, South Korea with less than a dollar per person on health care and a population of 49 million has only 234 local environmental protection (World Bank 2009). government units and China with a population Such a system could create distrust in the of 1.3 billion has only 3,203 local governments local authorities among residents in the long run. up to the municipal level and a total of 47,270 39. It may be helpful to have a closer look at TAO/ responsible for reducing the total number of SAO governments and explore opportunities local governments from 416 in 2005 to 326 for administrative consolidation and have a in 2010 (see Moisio, 2010). Other European narrower focus on priority local services. If small countries such as Norway, Sweden, Denmark, local government units are unwilling or unable Germany and Netherland had achieved a to consolidate or form partnerships to carry out more dr a ma t ic c onsolida t ion of loc a l some of the more demanding responsibilities, government through non-voluntary programs it may be necessary to consider redefining in the past (see Table 3.4). Thailand may the scope of duties for tambons. Several consider reviewing these experiences to European countries in recent years have carried develop own program for local government out municipal consolidation programs. Finland consolidation. Alternately it could treat all instituted a special grant program to induce LAOs below the population size of 10,000 as consolidation of smaller local governments unincorporated local jurisdictions. This would on a voluntary basis. This grant program was create strong incentives for local consolidation. 31 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 Table 3.5 : : Median/average size of local governments in comparison Country Total Population No. of LGs Average LG Pop. Size (millions) (thousands) Thailand 69 7854 9 UK 62 386 123 China 1300 44000 107 Indonesia 238 502 485 Brazil 192 5560 31 East Asia and Pacific 171 South Asia 71 SS Africa 172 Middle East 112 LAC 63 Europe and CA 29 North America 12 Source : Shah (2006, 2007) Table 3.6 : Local government consolidation in Nordic countries: 1950:2010 Country 1950 1992 2005 2010 Finland 547 460 416 326 Sweden 2,281 286 290 290 Norway 744 439 430 430 Denmark 1,387 275 270 98 Source : Moisio et al. 2010 OWN SOURCE REVENUES AND TAX SHARING 40. Thailand has opted for a highly centralized received from local surcharges on central and harmonized tax regime. Such a system is taxes and the rest are received as tax shares advantageous in avoiding an overly-saturated and transfers. The only productive revenues “tax jungle”, as well as limiting wasteful tax available to municipal gover nments is competition. However, it has the disadvantage 0.7 percent surcharge on the central value of creating a local accountability void for local added tax, housing and land taxes and land governments, who depend primarily upon development tax and local development tax central transfers to finance expenditure from tobacco, petrol station and hotels. Table programs, absolving the need to raise taxes 4.1 lists major tax instruments and their revenue locally. If given the responsibility and actual intake. It is worth noting that for locally power to implement significant own-source collected taxes, with the sole exception of local revenue collection, the distance is dramatically development tax, center defines the base and shortened between a citizen paying taxes and the rate and local authorities collect these a government providing services using those taxes (see Table 4.1 for details). In this context, taxes—relying on a distant central government proposed new legislation for land and built blurs this line of accountability considerably. structures tax giving local government greater Local authorities in Thailand have their total autonomy in its administration is a very welcome income guaranteed to equal approximately initiative but the draft legislation could be further 25 percent of net central government income. strengthened by following a number of critical Of these, about 25 percent of revenues refinements listed in Box 4.1. Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 32 Table 4.1 : Local revenues by own source (2009) Source Amount (Bt Million) Locally collected taxes 22,777.0 Land and Housing Tax 17,164.8 Local Development Tax 1,274.9 Signboard Tax 1,640.6 Animal Slaughter Tax 89.7 Swallow Bird’s nest Duty 202.2 Local Development Tax from Tobacco, Petrol Station and Hotels 2,404.9 Locally collected non-tax revenues 9,434.8 Fees, Fine and License 3,819.3 Revenue from Assets 1,972.5 Revenue from Local Utility Services 811.1 Miscellaneous Revenue 5,843.8 Local surcharges on central tax 13,086.2 Specific Business Tax Surcharge 4,000.0 Liquor Tax 9,243.2 Liquor and Gambling License 145.0 Total own source revenues 45,600 Source : CGD 2009, Local Authority Survey (World Bank) 41. Among LAOs, PAOs have access to The size and share of these taxes has shown revenues from relatively productive taxes some variation over the years, but has generally such as vehicle registration fees, hotel rooms, declined since the beginning of Thailand’s petroleum and tobacco taxes. There are four decentralization program. In 2000, locally-levied primary taxes that municipalities and TAOs are taxes represented 11.4 percent of total local entitled to levy and collect themselves. These authorities’ revenues. This gradully fell to 6.3 taxes include the Housing and Land Tax, the percent in 2005. In spite of a brief spike back Local Development Tax, the Signboard Tax to 8.6 percent in 2006, in 2007, they fell again and the Animal Slaughter Tax. These taxes are to just 5.6 percent, and held at 6.0 percent in directly admininstered and collected by local 2008 (DOLA 2008). authorities-however, tax rates and exemption rules are generally governed by centrally mandated legislation. Box 4.1 The Land and Built Structures Tax Act (2011 draft) This draft law is intended to repeal the existing Land and Housing Taxes and the Local Maintenance Taxes and replace these with the new Land and Built Structures Tax. This tax will be assigned to LAOs, thereby raising their revenue autonomy. The new tax is to be assessed on the market value of land and structures and all revenues will accrue to local LAO. Properties owned by Crown and state and public enterprise assets, foreign embassies, religious sites, cemetries and Thai Red Cross will be exempt from this tax. The tax will be assessed by each LAO based upon a survey of local properties and also the LAOs may follow centrally recommended tax rates or impose own tax rates provided such tax rates do not exceed 0.5% of assessed price for commercial properties, 0.1% of assessed price for residential and 0.05% of assessed price for agricultural land and property. The LAOs may collect these taxes on 33 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 their own or ask a public agency to collect such taxes on their behalf for a fee not exceeding 5% of total value of tax collections. The Ministry of Finance will set up a Land and Built Tax Collection Data Center that will issue tax invoices on behalf of LAOs and maintain an uptodate tax collection database for the nation as a whole. The Land Department will prepare a digital map for the country linked with property registration data. For the purpose of assessing properties all LAOs will conduct a survey of local land and structures. These survey data will be passed on to the Central Tresaury Department to deliver estimated prices to each LAOs. A Central Committee chaired by the permanent secretary of MOF and comprising the DG Budget Bureau, DG DOLA, DG Land Department, DG Public Works Department , Director Fiscal Policy office (secretary), Director NDC, Governors of Bangkok and Pattaya, three experts, mayors of municipalities and Chief Officers of TAO reresented on the NDC would be entrusted with setting rates on a bi-annual basis for a four year cycle. Provincial subcommittees chaired by the governor and comprising local Revenue Office, Local Treasury Officer, Local Public Works and Town Planning Officer, 3 mayors and 5 chiefs of TAOs will compile data and make recommendation to the central committee on proposed rates by August. LAOs will submit survey results by May and data on assesments and past collections to their provincial sub-committees by July. The Central Committee will make its recommendation on rates known to LAOs by October and to Bangkok by November. All LAOs will notify individual tax payers by January 1 regarding the taxes due that year. The draft law is a welcome initiative as it will enhance local revenue adequacy and autonomy by giving LAOs significant autonomy in setting base, determining rates and collection of this tax. Its implementation will result in developing a comprehensive database of land and structures, ownership, estimated values and taxes paid. The proposed law broadens the tax base to include most properties and by eliminating the owner –occupied exemption for residential properties, it has sought to limit exemptions. The law also aims to improve tax administration by improving the information base on property assessments and tax collections. The proposed law also makes provisions for updating of assessments on a four year cycle. It has also attempted to unify various land and property taxes under a single legislation. Further refinements to strengthen the proposed legislation The draft law could be further improved by requiring maintenance of a shadow roll of the value of all exempt properties. Exempt state and public enterprise properties could be required to pay “grants-in-lieu of taxes” (in equivalent value to assessed property taxes if they were not tax exempt) to local governments as done in USA and Canada. Furthermore, any exemptions granted by local government due to special circumstances must have a sunset provision of not more than four years. There is also a room for further broadening the base of this tax by bringing the assessed value of power, gas, electric, cable and telephone lines and water pipelines and communications towers under this tax net as done in industrial countries. Preferential taxation of built structures over land would also help more intensive use of land in urban areas and therefore it is desirable to tax land component at a higher rate than the building component. Setting up an Equalization Board at the national level that ensures that the assessed values of property across various jurisdictions are comparable would be another important step. Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 34 42. Decentralization reforms in Thailand have to enhance local government accountability not addressed the issue of opening up greater to local residents. These and related issues in opportunities and incentives for local self finance local self finance are discussed below. 43. Local governments have little incentive income, there is little incentive for LAOs to to raise revenues from own sources and be increase their own tax efforts and raise more accountable to their residents. Thailand’s revenues from own sources, as such efforts decision to assure local governments that their result in reduced central transfers exactly total income be at least 25 percent of net central by the amount of additional local revenues government income, including own-source raised. Such a perverse incentive limits local revenue, shared taxes, general and specific government accountability as well as places purpose transfers, has led to some unintended greater financial burden on central government. perverse consequences. Because the central This anomaly can be easily corrected by linking administration is required to meet the the fixed target to net central government 25 percent target of net central government income excluding own source local revenues. 44. Local tax autonomy is weak or non-existent guaranteed a fixed share of net central and undermines accountability of local government revenues. However, in the interest administration to local residents. Raising revenues at the margin locally is critically The Decentralization Act allows LAOs to important for accountable local governance. set-up local tax collection agencies – leading In Thailand local government tax autonomy to administrative inefficiency. Given that the is highly constrained. Furthermore, local current level of locally-sourced revenues are authorities are inadvertently discouraged from so small relative to centrally-collected shared raising revenues at the margin from own sources taxes and central transfers, setting up tax because of the overall cap on local government administration capability by each LAO would revenues as a share of net central government be costly for smaller LAOs. Tax contracting revenues. Even for locally collected taxes, to central government revenue collections central government exercises control over the agencies (on a performance contracting base and oversight on setting rates. This may basis) or the private sector or partnership be desirable to maintain the uniformity of tax arrangements with other LAOs might offer cost system and overcoming race to the bottom savings alternatives. e s p e c i a l l y w h e n l o c a l a u t h o r i t i e s a re INTERGOVERNMENTAL TRANSFERS IN THAILAND 45. In 2011 intergovernmental transfers under the Decentralization Act, general purpose represented approximately 54 percent of subsidy and specific purpose subsidies. local authorities’ revenues in Thailand. Table There are some auxiliary transfer instruments, 5.1 provides a breakdown of local authority such as the Thailand Village and Urban Revolving revenues including intergovernmental transfers Fund, the SML fund, the sufficiency fund from central to local authorities, such as the VAT and the contingency within the Central Fund 8 For more detail, see Thailand PER Discussion Paper 1: Planning, Budgeting and Fiscal Trends 35 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 however, these are small in volume on a the Village Fund Bt 200 million provides a per-LAO basis, and operate through unique revolving credit of Bt 1 million to 74,000 parallel mechanisms administered solely villages and over 4,500 urban communities by the central government outside of the across country with borrowing demands for decentralization mandate. As such, these small projects and is administered centrally by instruments are distinct from the standard the Village Fund Committee. transfers discussed below. For example, 46. Formula based general purpose transfers expenditure needs component of the allocation constitute 49 percent of these transfers and criteria, and LAOs are not required to account the remaining 51 percent of these transfers are that these transfers have been used for the intended for specific purposes i.e. to finance proposed purposes. However, the Department expenditures in specified activities such as of Local Administration provides annual education, health, social services, water and guidance to LAOs on how these funds have environment and general administration. OECD been budgeted, and as a result, funds are spent average for local authorities is conditional grants as they have been earmarked. While recognizing at 60 percent and unconditional 40 percent. the theoretical potential for discretionary In developing countries unconditional revenue spending, the practical realties of these grants sharing grants dominate. Output based would have them labeled as specific purpose conditional grants can possibly be superior under international definitions; accordingly, we to unconditional transfers as they preserve have treated them as such for the purposes local autonomy while strengthening local of this analysis. Currently, no data is available accountability. Under the classification to distinguish between operating grants and system used by the RTG, the general purpose capital grants; as such, our analysis has not transfers breakdown includes some Bt 45 drawn a distinction between these two different billion earmarked for specific purposes, officially categories. this is just for the purposes of calculating the Table 5.1 : Sources of local authority revenues in Thailand (2009) Source Amount (Bt Million) Share Total own source revenues 45,600 16% Total shared taxes 116,016 41% Central government transfers 124,100 43% General Purpose Transfers 94,062 33% Specific Purpose Transfers 30,038 10% Total local authority revenues 285,716 100 % Source : CGD 2009 and Local Authority Survey (World Bank) General Purpose Transfers 47. Two general purpose transfers are currently government VAT revenues and (b) the so-called in use under the Thai system: (a) formula general duty transfer. The following paragraphs based sharing of a specified portion of central discuss these transfers. (a) The Value Added Tax Transfer according to the Decentralization Act 9 This distinction, is however, is not very useful for analytical purposes and for good practice. Conditional grants are “bad” when they are input control based as they undermine local autonomy. Unconditional revenue sharing grants on the other hand undermine local accountability. Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 36 48. Under the 1999 Decentralization Act, local Allocation of this tax is undertaken by the authorities are entitled to receive a share of not National Decentralization Committee and is more than 30 percent of VAT collected by the subject to amendment on an annual basis. As central administration. The VAT transferred to such, allocation changes from year to year, but local authorities constitutes about 18.5 percent the criteria typically used to determine allocation of total local revenues, making it the second includes population, area, revenue and or largest revenue source for local authorities. budgetary need (KPI 2008). Table 5.2 : Allocation of VAT under decentralization act (2009) LAO Amount Share BMA 3,789.0 5.8% Pattaya City 639.2 1.0% PAOs 6,456.8 9.9% Municipalities 22,448.0 34.5% TAOs 31,667.1 48.7% Total 65,000.0 100.0% Source : CGD 2009, Local Authority Survey (World Bank) 49. As presented in table 5.2, transfers of VAT of LAO. From the graph, it is clear that BMA under the Decentralization Act are targeted has the greatest own source revenue potential most heavily towards TAOs and municipalities, (almost 50 percent of total revenue) and also at 48.7 percent and 34.5 percent of the benefits from shared revenue sources (which total VAT transfer respectively. PAOs receive bring the total to more than 70 percent). VAT approximately 10 percent, while the BMA and transfers under decentralization play a much Pattaya city receive 5.8 percent and 1 percent more important role in other LAOs, especially each. Figure 5.1 shows the relative importance Pattaya city, municipalities and TAOs. of different local revenue sources across types Figure 5.1 : Relative importance of different local revenue sources - 2008 100 % 80 % 60 % Specific purpose subsidies Generl purpose subsidy 40 % Shared revenues 20 % VAT Local surcharge on central tax 0% Locally-levied taxes and fees A ity s es s O O BM iti C PA TA al ya ip tta ic un Pa M Source : CGD 2009, Local Authority Survey (World Bank) (b) The General Purpose Transfers 37 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 50. While under government definitions the 15 percent of central government transfers general purpose transfer constitutes the largest (as indicated in table 5.1). The primary objective share of local government revenues, under of the general purpose subsidy is filling conventionally accepted definitions (which the financing gap and allowing local exclude earmarked funds), the general purpose authorities to meet their mandated expenditure transfer comprises approximately 8.3 percent responsibilities. of total local revenues, and approximately 51. After the total pool for general purpose municipalities and TAOs is allocated on a subsidies is determined, 5 percent of the total per capita basis; the remaining 35 percent is is set aside as deficit grants and allocated divided equally between the local authorities according to the difference between revenue (NDC 2009). The 10 percent share that was and expenditure in basic public service allocated to PAOs is divided as described provision of the LAOs. Of the remaining 95 above. Table 5.3 gives the breakdown of how percent, 90 percent is allocated to municipalities the general purpose subsidy has been and TAOs, and 10 percent is allocated to allocated. Table 5.4 illustrates how the 29.1 PAOs. 65 percent of the 90 percent share to billion baht are allocated across LAOs. Table 5.3 : General purpose subsidy – 2010 Allocation Transfer (millions of baht) General (residual) 29,062.6 Earmarked component 45,209.1 Train fare subsidy 2.0 Healthcare services 890.0 Survival subsidy for AIDS patients 223.6 Survival subsidy for the disabled 1,909.3 Survival subsidy for elders 10,970.7 Quality of life (Southern Provinces) 273.1 Income subsidy (Southern Provinces) 949.8 Sport facility management 134.6 Lunch services 13,030.8 Supplements (Milk) 11,287.5 Babycare center 5,071.8 Social service center 3.5 Nursery homes for elders 93.7 Education management capacity improvement 368.6 Total (excluding expenditure need component) 29,062.6 Source : Translated NDC meeting minutes 2009 Table 5.4 : General subsidy allocation Total 29,062.6 City planning 102.5 Remaining general subsidy 28,960.1 95% to LAOs 27,512.1 10% to PAOs 2,751.2 40% to municipalities 11,004.8 65% allocated per capita 7,153.1 35% allocated equally 3,851.7 60% to TAOs 16,507.2 65% allocated per capita 10,729.7 35% allocated equally 5,777.5 5% to LAOs based on revenue-expenditure gap 1,448.0 Source : Translated NDC meeting minutes 2009 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 38 Specific Purpose Transfers 52.There are currently 30 specific purpose programs are a matching transfer, where 90% transfers, accounting for some 50.6 percent is provided by the central administration and of the total transfers to local authorities and 10 percent is provided by local authorities. approximately 27.5 percent of total local However, others such as the subsidy for the revenues. These are targeted towards meeting elderly are allocated strictly on a per capita central mandates in social and environmental registered elderly basis, 500 baht per registered policies and/or the achievement of specific recipient. Specific purpose subsidies cover a nationally-set policy objectives. Specific wide range of different policy objectives, ranging purpose subsidies targeting environmental from health and education to social welfare. 53. Allocation of specific purpose subsidies remains firmly entrenched at the central level, can follow a number of different rules, but most allowing for central prioritization of different typically, subsidies are allocated on a per-cap- policy objectives. Table 5.5 provides details ita eligible basis. Thus, with some exceptions on the allocation of specific purpose subsidies such as disaster relief funds or environmental across functions. A total of 96,402.9 million subsidies, special purpose subsidies are more baht is allocated to local authorities across 30 commonly used to cross-subsidize specific different categories (including those categories government priorities than to target specific earmarked under the “general purpose grants” areas or districts. While some of these subsidies pool), within six different groups. To receive are directed towards infrastructure investment, specific purpose subsidies, local authorities many are targeted towards social service and must commit to spending the funds on the welfare provision. These transfers are attractive centrally-defined programs to which they have to the central administration because control been attached. Table 5.5 : Specific purpose transfer allocation (includes earmarked general purpose transfers) Functional allocation Transfer (millions baht) Share Health Subsidies 19,451.9 20.2% Healthcare services (fixing infrastructure) 21.1 0.0% Primary care unit innovation project 7,029.7 7.3% Healthcare services 890.0 0.9% Survival subsidy for AIDS patients 223.6 0.2% Supplements (Milk) 11,287.5 11.7% Education Subsidies 28,497.3 29.6% 15-year free education 2,881.4 3.0% Mandatory education (healthcare cost) 500.0 0.5% Mandatory education (rent) 80.0 0.1% Mandatory education (pension) 1,743.6 1.8% Teachers’ salary 9,892.8 10.3% Education management capacity improveme 368.6 0.4% Lunch services 13,030.8 13.5% 39 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 Functional allocation Transfer (millions baht) Share Social services subsidies 41,923.8 43.5% Social support for the disabled 1,374.1 1.4% Babycare center 5,071.8 5.3% Babycare center by religion department 1,765.6 1.8% Elders’ insurance project 19,512.2 20.2% Social service center 3.5 0.0% Nursery homes for elders 93.7 0.1% Survival subsidy for the disabled 1,909.3 2.0% Survival subsidy for elders 10,970.7 11.4% Quality of life (Southern Provinces) 273.1 0.3% Income subsidy (Southern Provinces) 949.8 1.0% Water and environment subsidies 3,948.3 4.1% Water problem Nakorn Ratchasima 595.4 0.6% Electric water pump 809.1 0.8% Environmental action plan project 2,543.9 2.6% General administrative subsidies 2,445.1 2.5% Supporting personnel transfers from central to local government 1,503.6 1.6% Community development plans’ implementation 839.0 0.9% City planning 102.5 0.1% Miscellaneous subsidies 136.6 0.1% Sport facility management 134.6 0.1% Train fare subsidy 2.0 0.0% Total 96,402.9 100.0% Source : Translated NDC meeting minutes 2009 Allocation of transfers across provinces and types of LAO 54. Narrowing the focus of analysis from the target specific projects, regions or objectives. total pot of transfers to individual levels of the As such, per capita variation of transfers across local administration, it is also useful to consider LAOs itself does not necessarily constitute a what resources are being transferred to the problem. However, it does draw attention to the different provinces and to different types of balance between general and specific purpose LAOs within the provinces. Table 5.6 provides transfers-the heavier weighting towards some detail on total transfers per capita to specific purpose transfers, which helps account the provincial level, broken down into PAOs, for the variation in total transfers, leaves less Municipalities and TAOs. It quickly emerges space for local-autonomy promoting general that there is significant variation in per capita purpose transfers. Furthermore, even within transfers across all three types of LAOs, most general purpose transfers, formulas are subject exaggerated in the municipalities and TAOs. to change—the criteria use remain fairly stable This is at least partly explained by the prominent (population and equal allocation components), role of specific purpose transfers, which are but the relative weighting of these criteria may allocated using a variety of criteria-for example, change depending on the year—thus, some some transfers use a per-capita of affected degree of instability exists within the general population targeting scheme, while others purpose allocation. Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 40 Table 5.6 : Total per capita transfers by type of local authority by province – 2009 Type Min Avg Max PAOs 5.9 277.5 736.9 Municipalities 65.6 916.6 2,198.3 TAOs 175.9 1,426.8 11,700.5 Source : Local government survey 2010 Figure 5.2 : Variation in total per capita transfers by type of local authority by province—2009 3000 2500 2000 1500 1000 500 0 s es s O O iti PA TA al ip ic un M Source : Local authority survey (World Bank) INTERGOVERNMENTAL TRANSFERS IN THAILAND : AN ANALYSIS General Purpose Transfers VAT under Decentralization Act 55. Sharing of VAT as mandated under the government. The allocation criteria mostly use Decentralization Act has several merits… fiscal need factors and therefore are expected It provides significant amount of resources to to have an equalizing impact. It also rewards local authorities in a transparent manner while tax effort by distributing a small percentage of maintaining a uniform tax base and using the funds as an incentive for enhanced tax effort. superior tax collection capacity of the central 56. … As well as some important limitations. subsidy. Rationale for having two separate First, the total pool of the program is not defined general purpose programs administered by law and varies from year to year. This introduces by the same institution- the Central government’s some degree of uncertainty in local planning. National Decentralization Committee – is unclear. Second, both the general purpose subsidy Third, combining fiscal need compensation and the VAT transfers programs as currently with rewards for fiscal effort in the same constituted share the same objectives and the formula implies that various factors work at VAT transfers program uses a somewhat more cross purposes and limit the achievement complex formula than the general purpose of overall objective of the transfer. 41 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 57. Revenues from VAT surcharges are not favor of major urban centers where company shared equitably. Under current rules, the share headquarters may be located at the expense of VAT that is distributed to local authorities of smaller jurisdictions. This inequity could be is based on the tax jurisdiction in which the overcome by allocating VAT share by point company selling the good or services is of sales or other macro indictors such as registered, rather than the jurisdiction in which consumer expenditures. transaction takes place. This creates a bias in General Purpose Subsidy 58. The stated objectives of the general manner thereby strengthening local autonomy. purpose subsidy is the same as that of the Further, the program recognizes the differential VAT transfers namely filling the vertical fiscal responsibilities of various tiers of the local gap in view of limited revenue raising powers administration especially among provinces, with local authorities while having extensive urban municipalities and rural local self- service delivery responsibilities. The program governments and attempts to take this into as currently constituted has important merits. consideration in allocation criteria. Thus the The determination of total pool, as a top up allocation criterion for provinces is justifiably at of local resources to bring local authorities’ variance with other types of local authorities. share of net central government revenue to 25 Allocation criteria are simple, objective and percent, is done transparently and objectively. transparent - this represents a departure from The program transfers significant amounts of more complicated formulae in practice in other resources to local authorities in an unconditional countries. 59. The program uses mostly need factors and improves only very slightly more when general has very little equalization impact if equalization purpose transfers are added to the total. Under is simply defined as equal per capita revenues the German equalization system all states must per jurisdiction. Traditionally equalization is be brought up to at least 92.5% of national defined in terms of the ability of each jurisdiction average standard in per capita revenues. The to provide reasonably comparable level of public Thai program as depicted in Figure 5.1 falls far services at reasonably comparable levels of short of such a standard. Figure 5.6 suggests tax burdens. This concept however could not that there is only a weak negative relationship be implemented here due to data limitations. between GPP per capita and general purpose The simpler concept used here is, however, transfers per capita. Figure 5.8 (presented consistent with the concept used under the later) also suggests that when looking at total German Fiscal Equalization program. Figure transfers across different orders of government, 5.3 presents a Lorenz curve which looks at both PAOs and municipalities demonstrate a the cumulative distribution of revenues across positive relationship between GPP and total provinces divided into quintiles. From the curve, transfers. As such, our analysis suggests that we see that the equitable distribution of local general purpose transfers have only a very revenues improves from own source to own- modest impact on equalization across provinces. source and shared source revenues, and then Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 42 Figure 5.3 : Cumulative distribution of local revenues per capita across provinces including general purpose transfers (2006) 1 0.8 0.6 0.4 Full equality Own Source 0.2 Total revenues before general purpose transfers Total revenues after 0 general purpose transfers 0 0 .2 04 06 0 .8 1 Source : CGD 2009, Staff Calculations The program also faces the following limitations: • Deficit grant component may have adverse incentive effects. 5 percent of the general purpose transfer is used to finance deficits of local authorities. International experience has shown that such grants typically encourage higher and higher deficits into future. • Fiscal capacity indicator in provincial grant allocation rewards richer provinces. Provincial allocation criteria distributes 10 percent of the funds by nominal GDP. Therefore it provides a reward (albeit small) to richer provinces. This neither serves the gap filling or equalization objectives – the two objectives frequently stated for the general purpose transfer program. If on the other hand, grant funds were to vary inversely with the per capita GDP, then it would at least partially adress the equalization objectives. • Weighty equal per capita component discourages municipal consolidation. Equal per juisdiction grant component distributes 35 percent of grant funds to municipalities and TAOs. Economic rationale for this component is that all local authorities regardless of size require a minimum size of general administration. This argument, however, has to be weighed against some perverse incentives introduced by this component. First, municipalities and similarly TAOs vary significanly by population size and service area and therefore minimum size of general administration should incoporate these considerations. Second, and more importanly, a large weight (35 percent) of equal per jurisdiction component, would vitiate against municipal consolidtion – the importance of which reforms in Thailand are identified in section 2. International experience has shown that such a component creates incentives for municipal fragmentation. Brazil had 3,000 municipalities prior to the introduction of equal per municipality component in its general purpose transfers. Now Brazil has more than 5,000 municipalities – (Rezende, 2007) most of these as a result of breakup of existing jurisdictions. Some would argue that such a concern in the presence of appropriate legal framework for redrawing municipal boundaries would be of minor significance. Brazil suggests otherwise, as it has had such processes in place but local politicians could not resist the temptation of receiving higher levels of transfers through the breakup of existing units. • Limited achievement of equalization objectives. Thailand has large fiscal disparities across provinces (see table 5.7). Bridging this economic divide is an important policy goal of the Government of Thailand. While the grant allocation formula is equalizing, its impact is quite small as shown by Figure 5.1. Table 5.8 further shows that grant funds vary positively with most fiscal capacity indicators and negatively with the poverty related needs indicator. This is contrary to the objectives of this grant program. 43 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 • Lack of special attention to poverty stricken areas. Table 5.8 shows that general purpose transfers are negatively correlated with local incidence of poverty as the Spearman’s rank correlation of these transfers with the poverty index is negative and significant. Size of the pool is inadequate to meet the ambitious objectives of the program. • The general duty transfer amount to 8.3% of revenues and is a much smaller program than the VAT sharing. Given the small pool of resources devoted to this program, expected of this program regarding equalization may be quite unrealistic. Table 5.7 : Fiscal disparities between provinces Type Min Avg Max Own source revenues per capita (2006) 78.0 355.9 2,150.7 Shared source revenues per capita (2006) 280.1 1,444.5 4,905.0 GPP per capita (2008) 31,431 132,954 1,202,042 Source : CGD 2009 Figure 5.4 : Per capita general purpose transfers and own source revenues General purpose subsidy per capita 3,500.0 3,0000. 2,500.0 2,000.0 1,500.0 1,000.0 500 0 500.0 1,000.0 1,500.0 2,000.0 2,500.0 Own source per capita revenue Figure 5.5 : Per capita general purpose transfers and shared source revenues General purpose subsidy per capita 3,500.0 3,0000. 2,500.0 2,000.0 1,500.0 1,000.0 500 0 1,000.0 2,000.0 3,000.0 4,000.0 5,000.0 Shared source per capita revenue Figure 5.6 : Per capita general purpose transfers and GPP per capita General purpose subsidy per capita 3,500.0 3,0000. 2,500.0 2,000.0 1,500.0 1,000.0 500 0 250,000.0 500,000.0 750,000.0 1,000,000.0 1,250,000.0 GPP per capita Source : CGD 2009, Staff calculations Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 44 Table 5.8 : General purpose transfers in relation to other indicators Spearman rank correlation coefficients between per capita general purpose transfers All provinces (N = 76) Provinces excluding BMA (N = 75) Per capita GPP 0.181 * 0.222 * Per capita own source revenues 0.185 * 0.229 ** Per capita shared source revenues 0.369 *** 0.421 *** Per capita own source + shared source revenues 0.354 *** 0.405 *** UNDP Human Achievement Index poverty incidence -0.527 *** -0.521 *** Source : CGD 2009, UNDP 2007, Staff Calculation Specific Purpose Transfers 60. Specific purpose transfers in Thailand ensure that central mandates in education, provide financing to local authorities for centrally health and social welfare are fully funded and mandated programs. With few exceptions, do not impose additional tax burdens on local overall objectives of these programs are to residents. 61. Financing is provided mostly on non- small match is to induce local ownerships of matching per capita basis for the service these programs. In aggregate these programs population. A notable exception is the have a small positive impact in equalizing local Environmental Action Plan which is matching revenues across various provinces as shown grant program with 90 percent of the funding by Figure 5.2. The specific purpose transfers provided by the center and the remaining 10 as currently constituted have a number of percent raised locally. The purpose of this drawbacks. Figure 5.7 : Cumulative distribution of local revenues per capita across provinces including specific purpose subsidies (2006) 1 0.8 0.6 0.4 Full equality Own Source 0.2 Total revenues before general purpose transfers Total revenues after 0 general purpose transfers 0 0 .2 04 06 0 .8 1 Source : CGD 2009, Staff Calculations 45 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 Specific purpose transfers limit local autonomy. Specific purpose transfers account for about 51 percent of central transfers and 27.5 percent of local revenues (see table 5.1). This implies that slightly over a quarter of local expenditure are directly controlled by the central government. For these expenditures, local authorities simply act as a deconcentrated arm of the central government. If carefully designed, output-oriented specific purpose transfer can improve accountability for the delivery of nationally identified priorities while still allowing for local autonomy in the pursuit of these objectives, the input-control oriented nature of current specific purpose transfers leaves little room for local autonomy. In view of the large presence of central government in deconcentrated field offices, the immediate need for such local mandates is unclear, especially when local authorities are afforded little flexibility in the implementation of most of the programs. • Specific purpose transfers have the potential to undermine local priorities. This may well be the objective of national programs where such programs receive lower rankings in local priorities. However, it appears that education, health and social services are high local priority as well. In that event, central mandates could override alternate possibly more cost effective locally designed programs that would have to be fully financed by local authorities themselves. • Specific purpose transfers are not well targeted to poorer local jurisdictions. In terms of their aggregate impact, specific purpose transfers vary directly with fiscal capacity and inversely with fiscal need factors although the latter correlations are quite weak (see Table 5.9). Table 5.9 : Specific purpose subsidies in relation to other indicators Spearman rank correlation coefficients between per capita specific purpose subsidies : All provinces (N = 76) Per capita own source + shared source revenues 0.514 *** UNDP Human Achievement Index-Health index rankings 0.176 * UNDP Human Achievement Index - Education index rankings 0.307 ** Source : CGD 2009, UNDP 2007, Staff Calculation • The design of these transfers is not linked to accountability for results. In their design, specific purpose transfers are focused on input conditionality and therefore expenditures of local authorities are subject to monitoring and audit but the design provides no incentives for service delivery performance. • Uniform matching of environment programs could disadvantage poorer local jurisdictions. While the matching rate is quite small and should not pose significant burdens on poorer local jurisdictions provided the assisted environmental protection program is of high local priority. If on the other hand, the program is primarily of national importance, local council may see even a 10% burden too onerous. • Limited focus on setting national minimum standards in social services and infrastructure. Specific purpose transfers can play an important role in creating a level playing field across the nation by setting national minimum standards for social services and infrastructure. Thailand has wide divergence in these standards and major infrastructure deficiencies in various local jurisdictions. These concerns, however, are inadequately addressed in current transfers. Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 46 Figure 5.8 : Distribution of transfers across type of LAOs PAOs Total transfers to PAOs (Millions THB) 2,000.0 1,800.0 1,600.0 1,400.0 1,200.0 1,000.0 800.0 600.0 400.0 200.0 0 200,000 400,000 600,000 800,000 GPP (Millions THB) Municipalities 2,500.0 Total transfers to municiplitiess 2,000.0 (Millions THB) 1,500.0 1,000.0 500 0 200,000 400,000 600,000 800,000 GPP (Millions THB) TAO/SAOs 8,000.0 7,000.0 Total transfers to TAOs 6,000.0 (Millions THB) 5,000.0 4,000.0 3,000.0 2,000.0 1,000.0 0 200,000 400,000 600,000 800,000 GPP (Millions THB) Source : NESDB 2010, LAO survey (World Bank) Reforming Intergovernmental Finance in Thailand: Possible Options Reform of General Purpose Transfers (a) To provinces 62. The allocation criteria to the PAOs are relatively the regional coordination functions intended well structured. Given the less-important role to be performed by PAOs are best carried out PAOs are intended to play in service delivery, using a medium-term planning framework; thus the share received (10 percent) is appropriate- a simple, predictable and transparent allocation additional share could further exacerbate risks criteria such as is used for general purpose of overlapping service responsibilities between transfers is an important achievement. It is regional and local governments. Furthermore, suggested, however that weight for equal 47 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 allocation component may be decreased to the case. This may be achieved by making 20 percent and that for population component the funds for this component available only to may be increased to 50 percent – in order to provinces that have below provincial average address the issues presented earlier. In addition, per capita GDP. Total pool for provinces may provincial per capita GDP component allocation be a fixed percentage of central revenues – say may be made to vary inversely with the nominal 1 percent of total. GDP as opposed to positively, as is currently To urban and rural municipalities (b) 63. The previous section highlighted a number embody fairly high weight for the equal allocation of concerns relating to the two general purpose component limiting the positive impact of transfers, including the adverse incentives of population factor on equalization. To overcome deficit grants. Also the total pool for the VAT these limitations, there are various options transfers is not fixed and for the general duty that should be examined closely for their transfer it is determined as a residual and is implementation in Thailand. relatively small. The allocation criteria also Option 1: Comprehensive Fiscal Equalization Program. 64. The Decentralization Committee of the above, supported by the finding of greater Government of Thailand has made equalization central and local spending in richer provinces as the primary objective of such a program than poorer that was revealed in this PFMR’s and has shown an interest in implementing a chapter on benefit incidence, widening comprehensive fiscal equalization program that existing fiscal gaps. The objective under a includes both the fiscal capacity and fiscal need comprehensive fiscal equalization program is to equalization components. The impetus for this help address some of these inequality concerns. objective emerges in the fiscal disparities noted 65. A formal fiscal capacity equalization program, government and most productive tax bases the so-called representative tax system are taxed by the central government on its own approach, is justified when local government behalf and on behalf of local authorities. Thus has independent access to a wide array of the tax bases are uniform with minor divergence productive tax bases on which they levy own of rates. In such a situation, results from rates. In Thailand, local access to independent representative tax system would not be very tax bases is weak or almost non-existent, most different those simply using a simpler approach of the tax bases are determined by the central of equalizing per capita revenues. 66. While justified in theory, a formal program of if reliable data were to be made available, fiscal need equalization for Thailand would be would be a daunting challenge. A more realistic difficult to implement in practice. Determining approach to achieving fiscal need equalization expenditure needs based on past data is a in Thailand could be through the use of output- cumbersome and a highly controversial topic based specific purpose transfers for merit even when using state of the art quantitative goods. Such transfers preserve local autonomy techniques. For Thailand, many difficulties exist. and enhance local accountability while achieving Accurately calculating differential expenditure equalization objectives as discussed in the needs of nearly 8,000 local authorities, even following sub-section. Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 48 66. While justified in theory, a formal program of if reliable data were to be made available, fiscal need equalization for Thailand would be would be a daunting challenge. A more realistic difficult to implement in practice. Determining approach to achieving fiscal need equalization expenditure needs based on past data is a in Thailand could be through the use of output- cumbersome and a highly controversial topic based specific purpose transfers for merit even when using state of the art quantitative goods. Such transfers preserve local autonomy techniques. For Thailand, many difficulties exist. and enhance local accountability while achieving Accurately calculating differential expenditure equalization objectives as discussed in the needs of nearly 8,000 local authorities, even following sub-section. Option 2: Refining the existing allocation criteria. 67. A simpler approach for improving the capita scheme should both reduce the incentive equalization performance of the transfer system for fragmentation as well as increase the is to refine existing allocation criteria. This has equalization impact of the transfers. Total pool. the benefit of retaining the strengths of the It is suggested that the total pool be defined existing system, namely transparency and by combining the existing VAT transfer and predictability, but tailoring formulas to better General Duty transfer programs, and defining that target reduced fiscal inequality. As discussed combined pool in law as a fixed percentage above, some two thirds of the general purpose (say 10 percent) of total central government transfer as currently constituted is allocated on revenues. The pool may be divided among a per capita basis (approximately 65 percent), urban and rural municipalities based upon with the remaining 35 percent allocated equally their relative population size. Note that current amongst municipalities and sub-districts. deficit grant components should be eliminated Increasing the size of the pool and re-weighting altogether. the allocation criteria more heavily towards a per (a) Allocation among urban municipalities Allocation criteria : Equal allocation -10 percent weight; Equal per capita by size class of municipalities – 90 percent weight. Municipalities should be grouped by population size class as follows: Population size class : 0-25,000, 25,000-50,000, 50,000-75,000, 75,000-100,000, 100,000-250,000, 250,000-500,000, 500,000-1 million, over 1 million (b) Rural municipalities Allocation criteria : Equal allocation -10 percent weight; equal per capita allocation 70 percent weight; equal per square kilometer of service area – 20 percent weight. Hold Harmless clause. As the new formula is implemented all local authorities will receive at least the amount received in the previous year. Stability clause. In the event of a decline in central revenues, total pool available for general purpose transfers will not be less than the pool in the previous year. 10 Thailand PFMR Discussion Paper 2: Distributive Analysis of Fiscal Policy 49 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 Predictability clause. The formula will be frozen for a period of five years and revisited in the last year of operation for renewal. Sunset clause. The total pool and the allocation formula will be operational for a period of five years and renewed after a review for subsequent 5-year period. No modification of the formula in the interim will be allowed. 68. The above suggestions are intended to its equalization impact and enhancing preserve the simplicity, transparency and predictability and stability of grants as a source objectivity of existing criteria while improving of local finances. Specific Purpose Transfers 69. Specific purpose transfers in Thailand are are accountable to citizens for results in service primarily motivated by a desire to set national delivery performance. The redesign of these minimum standards in social services. As noted specific purpose transfers offers important earlier, current design of these transfers simply opportunities in strengthening local finances serves to deliver central mandates and is intrusive and autonomy while creating an incentive while at the same time lacking any effective environment that fosters accountability for incentive mechanisms to ensure local authorities results. 70. Capital transfers to deal with measured by per capita own source revenues. infrastructure deficiencies. This is best done Richer local jurisdictions will be expected to by instituting planning grants based upon the provide a higher matching rate as opposed to minimum infrastructure standards decided poorer jurisdictions. The Indonesian experience centrally by taking into account availability of may be relevant here, where Indonesia funds over the planning horizon. The grants instituted such transfers in the 1970s and 1980s should be awarded to local authorities based to achieve a network of roads and schools upon central planning determination and not on with defined distance from residents. Local an ad hoc basis by application. Grants should authorities were asked to contribute land and preferably be matching with matching rate decide on location of school buildings. varying inversely with the fiscal capacity as 71. Output based operating transfers for based operating transfer offer the possibility of setting national minimum standards for merit maintaining national priorities and ensuring goods (education, health, social welfare minimum standards for merit goods while and infrastructure). As discussed above, the allowing local authorities the flexibility and universal objectives of specific purpose grants autonomy necessary to achieve those are to promote merit goods and target national objectives in a way best suited to their specific priority areas without overly infringing on local locality, and preserve local accountability to autonomy and flexibility. This is an especially constituents. Thailand may consider instituting important objective in Thailand given the relative half a dozen or so output based block grants. weight of specific purpose transfers (more A few illustrative examples are discussed below. than 50 percent of total transfers). Output Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 50 a) Output based school grants to encourage competition and innovation in education. Output based grants create incentive regimes to promote the results based accountability culture. Consider the case where the national government aims to improve access to education by the needy and poor as well as enhance quality of such education. A commonly practiced approach is to provide grants to government schools through conditional grants. These grants specify the type of expenditures eligible for grant financing as is currently the practice in Thailand, for example, books, computers, teachers’ aides etc and also financial reporting and audit requirements. Such input conditionality undermines budgetary autonomy and flexibility without providing any assurance regarding the achievement of results. Such input conditionality, in practice, is difficult to enforce as there may be significant opportunities for fungibility of funds. Experience has also demonstrated that there is no one-one link between increase in public spending and improvement in service delivery performance (see Huther, Roberts and Shah, 1997). To bring about accountability for results, consider an alternate, output based design of such grants. Under the alternate approach, national government allocates funds to local authorities based upon school age population. The local authorities in turn pass these funds to both government and non-government providers based upon school enrollments. Conditions for receipt of these grant funds for non-government providers are that they must admit students on merit and provide tuition subsidy to students whose parents do not have sufficient means to afford such fees. Conditions for the continuation of funds for all providers will be to improve or at the minimum maintain baseline achievement scores on standardized tests, improve graduation rates and reduce dropout rates. Lack of compliance with these conditions will invite public censure and in the extreme case a threat of discontinuation of funds with perpetual non-compliance. In the meanwhile reputation risks associated with poor performance may lead to reduced enrollments and associated reduction in grant funds. There are no conditions on the use of funds and schools have full autonomy in the use of grant funds and retain unused funds. Such grant financing would create an incentive environment for both government and non-government schools to compete and excel in order to retain students and establish reputations for quality education, as in the final analysis it is the parental choice that would determine available grant financing to each school. Such an environment is particularly important for government schools where typically staff have life-long appointments and financing is assured regardless of school performance. Budgetary flexibility and retention of savings would encourage innovation to deliver quality education. Thus output based grants preserve autonomy, encourage competition and innovation while bringing strict accountability for results to residents. This accountability regime is self enforcing through consumer (parental choice in the current example) choice. Such a school financing regime is especially helpful for Thailand where several local jurisdictions are plagued with poor quality of teaching and worse teacher absenteeism or lack of access to education in rural areas. The incentive regime provided by results based financing will create market mechanism to overcome these deficiencies over time. (b) Output based grants for local health financing. A similar example of such a grant in health care would allocate funds to local authorities based upon weighted population by age class with higher weights for senior citizens (65 years and over) and children (under 5 years). The distribution by local authorities to providers would be based upon patient use. Minimum standards of service and access to health care will be specified for the eligibility to receive such transfers. 51 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 (c) Output based grants for social welfare. Such grants would provide matching assistance to local authorities based upon the relevant service population e.g. elderly without care, single mothers, orphans etc. Matching rate would vary with the fiscal capacity of the local jurisdiction with higher matching rate for richer jurisdictions. (d) Output based transfers for road maintenance. Such a grant would be based on classification of roads by types and traffic use and provide per kilometer grants differentiated by the type of road classification. Minimum standards of up-keep service for such roads will be specified and future grant releases will depend upon local authorities certifying those standards are being met and providing information on road conditions and use. Indonesian experience with the use of such transfers in the 1990s is worth examination. Table 5.10 : Principles and better practices in grant design Grant objective Grant design Examples of better practices Examples of practices to avoid Bridge fiscal gap Reassignment of responsibilities, tax Tax abatement and tax-base Deficit grants, wage grants (China), abatement, tax-base sharing sharing (Canada, Finland, Thailand) tax by tax sharing (China, India) Reduce local/ regional General non-matching fiscal Fiscal equalization with explicit General revenue sharing with fiscal disparities capacity equalization transfers standard that determines total pool multiple factors (Brazil and India); as well as allocation (Canada, fiscal equalization with a fixed pool Denmark, Finland and Germany) (Australia, China) Compensate for benefit Open-ended matching transfers Grant for teaching hospitals Closed-ended matching grants spillovers with matching rate consistent with (South Africa) spill-out of benefits Set national minimum Conditional non-matching Road maintenance and primary Conditional transfers with conditions standards output-based block transfers with education grants (Indonesia before on spending alone (most countries), conditions on standards of service 2000) Education transfers (Brazil, pork barrel transfers (USA), and access Chile, Colombia). Health transfers ad hoc grants (Brazil, Canada), school finance, health and social transfers in Finland, “standard cost” allocation criteria in Finland Conditional capital grants with Capital grant for school Capital grants with no matching and matching rate that varies inversely construction (Indonesia before no future upkeep requirements with local fiscal capacity. 2000), highway construction matching grants to states (United States) Influence local priorities Open-ended matching transfers Matching transfers for social Ad hoc grants in areas of high national (preferably with matching rate assistance (Canada before 2004, but low local priority varying inversely with fiscal Finland) capacity) Provide stabilization and Capital grants, provided Capital grants with matching rates Stabilization grants with no future overcome infrastructure maintenance possible. that vary inversely with local fiscal upkeep requirements deficiencies capacity Source : Adapted from Boadway and Shah, 2009 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 52 LOCAL BUDGETING AND PUBLIC FINANCIAL MANAGEMENT Local Budgeting 72. Local budgeting in Thailand follows detailed The guidelines dictate an operating budget guidelines on budget process, budget planning, format that shows line items by objects budget formulation and execution issued by the (salaries, travel, purchase of equipment etc) of MOI. Budget planning mandates preparation expenditure and revenues by source. The of both long-term strategic planning as well guidelines do not require line item presentation as preparation of a three-year rolling local by function, by program or by organizational development plan. These guidelines impose unit. The capital budget is prepared separately formal requirements for citizen participation in and covers all investment expenditure financed the budget planning and formulation process. by reserve funds, project grants and borrowing. 73. According to guidelines, the chief executive is a requirement that for all LAOs, a three year of a LAO is responsible for preparation of the moving average of their expenditures must not budget and its presentation for approval to exceed 97 percent of their gross revenues. the local council. Upon council’s approval, the Second, personnel expenditures for each LAO budget must be ratified by the relevant central cannot exceed 40 percent of total operating government executive who is designated as budget. Third, procurement for investment a supervisor for the respective LAO. If the expenditures can only take place against supervisor declines to ratify, then budget must avaiable reserve funds at hand. All LAOs take either be amended following supervisor’s these guidelines seriously and comply fully with comments and resubmitted for his approval, the requirements of an orderly and timely budget or the decision of the supervisor overturned by preparation and execution cycle. All LAOs have approval of the same budget for a second time fully complied with fiscal rules. In general, the by the two-third majority of the council. During budget process in Thailand has worked well. the fiscal year, any deviation from the budget However, a number of further improvements requires approval from the local council. There are desirable in the interest of improving budget are also several fiscal rules in place to ensure transparency and citizen-based accountability fiscal discipline in budget execution. First, there (see also Box 6.1). Box 6.1 : Desirable Features of a Local Budget System • The budget process is comprehensive, including all fiscal entities associated with or connected to local Government and there are no extra-budgetary funds to interfere with fiscal discipline, transparency, accountability, and the struggle against corruption. • The budget minimizes the use of earmarked funds. • The budget is executed as enacted. • The budget process is annual to maintain control but is part of a multi-year financial framework. • The budget is based upon realistic forecast of revenues and expenditures. • The budget serves as a statement of local policy. • Expenditures are reported by administrative unit and according to basic purpose. • The budget format is user friendly. • The budget process is focused on service delivery performance. • The budget process incorporates incentives for law makers to respond to citi zen demand for services and for agencies to economize on the use of resources. Source : Mikesell (2007), p.27-28 53 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 74. Current budget format is not helpful in up accountability. A comprehensive move either managing local operations or being towards program and performance budgeting accountable to local citizens for service for all municipalities can dramatically improve delivery performance . Current line item constituents ability to hold local government expenditure by objects budget format is useful accountable for spending, as citizens can for planning and financial control over inputs. It is easily read budget data on quality and efficiency less useful in setting local priorities as it does not for their government-but more importantly, present expenditure by function. But its major can benchmark against other similar local limitations lie in its lack of potential to serve as governments. In the short run all LAOs may be a tool for managerial oversight on operations encouraged to present a unified budget that and its irrelevance as a tool for bottom-up identifies capital and operating expenditures accountability. To overcome these limitations, as well as operations of the extra-budgetary city municipalities only may be encouraged funds are presented as an annex to this budget. to gradually over the long term (over the next All LAOs in the short run may be encouraged decade) phase in first program budgeting and to present line item budget by objects of ultimately performance budgeting (see Table 6.1 expenditures, as already done but also, by for a definition of the concepts and Table 6.2 function, by programs and by organizational for an example from Montgomery County, USA). unit. This will help transparency of the budget Doing so will constitute an important movement as well as provide a better view of the local away from central controls and towards bottom government operations. Table 6.1 : Features of alternate budget formats Feature Line item Program Performance Contents Expenditures by objects Expenditures for a cluster Presenting a results based (inputs/resources) of activities supporting chain to achieve a specific a common objective objective Format Operating and capital Expenditures by program Data on inputs, outputs, inputs purchased impacts and reach by each objective Orientation Input controls Input controls Focus on results (service delivery performance) Associated Hierarchical controls with Hierarchical controls, Managerial flexibility management little managerial discretion managerial flexibility over over inputs and program paradigm allocation to activities within design but accountability the program for service delivery output performance Source : Shah and Shen (2007) Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 54 Table 6.2 : Montgomery County, Maryland – Solid Waste Services PUBLIC WORKS AND TRANSPORTATION PROGRAM: Program Element: Refuse Collection - Residential PROGRAM MISSION: To provide reliable, concenient cubside resedential colelction in designated areas of the County while accheiving a high dgree of customer satisfaction COMMUNITY OUTCOMES SUPPORTED: Improved environment Enhanced quality of life Healthy children and adults PROGRAM MEASURES FY02 FY03 FY04 FY05 FY06 FY07 ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL Outcome/Results Service Quality: Number of missed colelction complaints 1,686 3,245 2,614 3,135 1,741 3,000 Number of other customers complaints 507 652 485 650 422 600 Complaints per 1,000 households served 6.0 7.7 5.7 7.6 4.9 6.9 Efficiency Average cost per household served ($) 60.03 63.02 63.08 62.79 57.73 63.05 Average cost per ton collected ($) 68.74 67.75 64.51 73.75 61.87 63.07 Workload/Outputs: Number of households served 84,788 85,085 85,034 85,192 86,252 86,410 Tons of refuse collected 74,044 79,153 83,158 72,531 80,472 86,382 Number of service requests 23,492 26,529 25,005 24,300 24,414 25,000 Number of calls for information 10,118 9,482 8,678 9,650 6,621 10,000 Inputs: Expenditures ($000) 5,090 5,362 5,364 5,349 4,979 5,448 Workyears 12.3 11.9 10.7 11.4 11.7 12.9 Source : Montgomery County Office of Management and Budget 2006 75. Central government supervisory control potential for this abuse, supervisory over local budget approval undermines endorsement must be automatic after the lapse local autonomy. The requirement for central of one week upon council’s approval unless government endorsement is based upon the the supervisor intervenes to identify breach rationale of assuring that local government of specific laws and regulations by the local follow fiscal rules and do not undertake undue gover nment. In the latter case, local fiscal risks to create liabilities or potential for gov e r nme nt w ould be e mpow e re d t o the central government bailouts. In practice executive first quarter of its budget pending this provision is subject to abuse by the central review of supervisor’s observation by the government officials as it gives them an entry proposed Local Government Supervisory point to reformulate budget consistent with their Commission. own rather than local priorities. To overcome Local Public Financial Management 77. Local governments in Thailand operate external audit of all local governments conducted under clear guidelines for financial accounting by the Office of the Auditor General (OAG) on and reporting, cash management, procurement a three year cycle. However, actual practice and debt management. Local governments are often differs to the issued guidelines. In order to also subject to internal and external controls improve local financial management in Thailand, to ensure integrity of operations. There is also a few of issues require further attention. 55 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 78. Local authorities could increase fiscal performance for each service delivery unit and transparency by publishing annual financial on a functional basis. accounts with information on budget-to-actual 79. Publish public procurement information addition, information on the name of the by unit cost in order to ensure that there is no contractor winning tenders should also be made cost escalation in the procurement of goods and available to the public as well as be assessable services --- as this is an indicator of the to the Ministry of the Interior and the office of robustness of the procurement system. In the auditor general. 80. Smaller LAOs and TAOs do not have the to build capacity in public financial management technical capacity to comply with DOLA for smaller LAOs and the TAOs. guidelines. This requires an active role by DOLA 81. At the present time there is no performance tand corruption in the use of public funds. and corruption auditing program for the It may be better to require LAOs to submit LAOs. Thai LAOs are audited by the OAG commercially audited financial statements on a for compliance with laws and regulations yearly basis within three months after the end (compliance audit) and for having adequate of the fiscal year as part of the pre-requisite for internal controls to ensure the quality of continuing to receive central grants as done in accounting information and financial reporting Brazil and most industrial countries. However (financial audit) but are not audited for value OAG may conduct a desk review of 100 percent for money-ensuring the best use for taxpayers of externally audited financial statements but monies in delivering services or to detect focus on comprehensive audits in any given corruption (performance and corruption audits). year of only 1-5 percent of LAOs selected using For external compliance and financial audit, a stratified random sampling approach and complete coverage on a three year cycle is applying performance and corruption audit probably unnecessary. In any case, such audits techniques. The results of these audits should are ill suited to discover waste, mismanagement be made publicly available. 81. At the present time there is no performance and corruption in the use of public funds. and corruption auditing program for the It may be better to require LAOs to submit LAOs. Thai LAOs are audited by the OAG commercially audited financial statements on a for compliance with laws and regulations yearly basis within three months after the end (compliance audit) and for having adequate of the fiscal year as part of the pre-requisite for internal controls to ensure the quality of continuing to receive central grants as done in accounting information and financial reporting Brazil and most industrial countries. However (financial audit) but are not audited for value OAG may conduct a desk review of 100 percent for money-ensuring the best use for taxpayers of externally audited financial statements but monies in delivering services or to detect focus on comprehensive audits in any given corruption (performance and corruption audits). year of only 1-5 percent of LAOs selected using For external compliance and financial audit, a stratified random sampling approach and complete coverage on a three year cycle is applying performance and corruption audit probably unnecessary. In any case, such audits techniques. The results of these audits should are ill suited to discover waste, mismanagement be made publicly available. Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 56 LOCAL BORROWING 82. Capital finance needs of local authorities concerns of sub-national borrowing: the moral especially in urban areas in Thailand are quite hazard issue surrounding the degree of implicit large and are likely to remain so in order to and explicit support provided by the central accommodate increasing pressures on government in relation to local borrowing, and infrastructure from urbanization and growth. the question of how to enforce it. Lenders are This point is well recognized in Thai legislation. more likely to lend to even a fiscally irresponsible All tiers of local administration are authorized to local government if they believe the central borrow from “public and corporate agencies” government will bail them out. To this extent, subject to the approval by the Ministry of the the MOI’s reluctance to sanction local borrowing Interior (MOI). In addition, BMA and Pattaya is understandable. Even the BMA with its City are authorized to issue bonds subject to bond rating of AA+ from The Thai Rating and clearance from the Ministry of Interior. In practice Information Service (TRIS) could not receive the clearance from the Ministry of Interior is such clearance from the MOI. rarely granted. This reflects one of the key 83. Aside from the moral hazard issues involved determine the creditworthiness of LAOs for local with obtaining MOI approval for local borrowing, borrowing if and where an explicit guarantee another key question is what the binding is involved-however, this raises additional constraints are for LAOs to access credit questions around establishing a clear framework markets, and what can be done to eliminate (with criteria, fees, etc.) for granting of explicit these constraints. One possibility is a lack central government guarantees. This could of credit worthiness due to limited tax further include some type of a fiscal responsibility decentralization and uncertainty in grant finance law which deals with the question of enforcement in view of frequent changes in grant allocation -for example, punitive measures against criteria. However, in an environment starting irresponsible local administrators. On the from zero borrowing, it is unclear whether these, other hand, non-guaranteed borrowing from the or other factors, act as key constraints. In part, financial markets, if allowed, should not be local borrowing is complicated by uncertainty approved or analyzed by PDMO; the rating on the clarity of roles of different institutions. agency (TRIS or other private rating) and lender Depending on whether borrowing is explicitly analysis should be sufficient. The PDMO is guaranteed by the central government, currently the process of investigating local different institutions may play a role in pricing and borrowing issues in more detail to inform any evaluating creditworthiness. For example, policy decisions. the PDMO is the most appropriate body to 84. Infrastructure finance in Thailand is, therefore, below market interest rates (currently in the primarily based upon reserve funds generated range of 4-8 percent with 4 percent for municipal locally from yearly revenue surpluses. Local infrastructure projects and a higher rate of 6-8% governments are able to retain 90 percent of for commercial operations) from the central yearly surplus as reserve fund and the remaining pool. These applications are reviewed by a 10 percent goes as a contribution to a central committee with LAOs and central administration pool maintained by DOLA of the MOI. The membership and chaired by the MOI. The central pool currently stands at about Bt100 central pool is laudable but both local revenue billion baht. Local governments can make surpluses and the central pool leave a large applications to borrow for a 15 year term at unmet demand for capital finance in Thailand. 57 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 85. As noted earlier, local access to credit rather than autonomous bodies and it requires well-functioning financial markets discourages private sector participation in and creditworthy local governments. Although the form of concessions and build-operate- these prerequisites are easily met in industrial transfer alternatives. Various U.S. states assist countries, traditions of higher level governments borrowing by small local governments through assisting local governments are well established the establishment of municipal bond banks in these countries. An interest subsidy to the (MBBs). MBBs are established as autonomous state and local borrowing is available in the state agencies that issue tax-exempt securities U.S. as the interest income of such bonds is to investors and apply the proceeds to exempt from federal taxation. Needless to say, purchase collective bond issue of several local such a subsidy has many distortionary effects: governments. By pooling a number of smaller it favors richer jurisdictions and higher income issues and by using superior credit rating of individuals; it discriminates against non-debt the state, MBBs reduce the cost of borrowing sources of finance such as reserves and equity; to smaller communities (see World Bank 1996 it favors investments by local governments and El Daher 1996). 86. In Canada, most provinces assist local In Denmark, local governments have collectively governments with the engineering, financial established a cooperative municipal bank. In the and economic analysis of projects. Local U.K., the Public Works Loan Board channels governments in Alberta, British Columbia and central financing to local public works. An Nova Scotia are assisted in their borrowing important lesson arising from industrial countries’ through provincial finance corporations which experience is that municipal finance corporations use the higher credit ratings of the province operate well when they are run on commercial to lower costs of funds for local governments. principles and compete for capital and borrowers. Some provinces, notably Manitoba and Quebec, In such an environment, such agencies allow assist in the preparation and marketing of local pooling of risk, better utilization of economies debt. Canadian provincial governments on of scale and applying their knowledge of local occasion have also provided debt relief to their governments and their financing potentials to local governments. Autonomous agencies provide access to commercial credit on more run on commercial principles to assist local favorable terms (see McMillan 1995). borrowing exist in Western Europe and Japan. 87. In conclusion, the menu of choices available without a guarantee, in which case there is no to Thai local governments for financing capital reason to involve PDMO. Given the context in projects are quite limited and available Thailand, the first option appears much more alternatives are not conducive to developing realistic. Tax decentralization is also important a sustainable institutional environment for to establish private sector confidence in lending such finance. However, as an initial step, the to local governments and sharing in the risks key issue appears to be either establishing a and rewards of such lending. It should however framework where one accepts that a guarantee be noted that for smaller municipalities and will always exist - in which case that guarantee TAOs capital finance may not be viable option should be explicit, and in which case PDMO at the present time and instead they would have would always be involved to assess and price to rely on central capital grants to finance local creditworthiness, or alternatively pursuing a infrastructure needs. framework where LAOs are allowed to borrow Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 58 88. The “MOI fund”, described above, is a The fund comprises 10 percent of reserves traditional source of fund for local borrowing. contributed by municipalities, returns on capital The MOI Regulation for the Fund to Promote donations and others. The fund is deposited and Municipality’s Affairs (2009) provides broad held within a commercial bank. Withdrawals powers to the MOI in the management of from the fund can only be made under three this fund. The fund committee is chaired by scenarios; (i) municipalities borrowing with a MOI’s permanent secretary and is mandated debt payment schedule limited to 15 years; (ii) to determine rules and criteria on the fund’s investment purposes by the fund office without management and administration as well as exceeding 50 percent of gross revenue of the is authorized to approve loans and budget fund; and (iii) operational expenses to the fund expenditure of the fund office. The sub-committee office. As of February 2010, capital accumulated of the fund chaired by DOLA’s director general is under the fund totals Bt 12 billion, of which Bt mandated to scrutinize proposed project loans 10 billion are loans approved to municipalities and provide opinions to the fund committee. and Bt 1.9 billion is under scrutiny process. LOCAL PUBLIC MANAGEMENT 89. Prior to decentralization, Thailand’s system guidelines including autonomy over appointments of local public management was highly and dismissals of personnel and increasing centralized. After the promulgation of the 1997 the share of local representatives in personnel Constitution with its focus on decentralization, commissions. To meet these constitutional local public management began to change. mandates, parliament enacted the Local In particular, section 284 of the constitution Personnel Management Act of 1999 which provided for greater local autonomy in personnel created a new framework for public management management, and section 282 set a number of by local authorities. 90. Each of these units of local administration constituting approximately 43 percent of the operates under their own independently total local civil service, permanent local authority elected council and executive, and each local employees at 15 percent, temporary employees authority operates their own system of public at 5 percent and local temporary employees at management with civil servants employed by the 37 percent (OCSC 2008). These civil servants local authorities. The civil service workforce is perform a variety of tasks, both technical and typically divided into four different categories of administrative. personnel: loaned central government officials, 59 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 91. On the service provision side, where local This means that while local authorities have authorities have assumed control over schools autonomy in the above categories, the criteria and medical centers, nurses, doctors and by which they evaluate and make decisions teachers are considered local civil servants and regarding local public management are passed are officially employed and remunerated by the down by the central administration. This local authority. Local authorities are entitled to includes fields of responsibility, grades of appoint officers for all manner of duties, ranging positions, and salary levels. It also includes from tax assessment and collection to everyday criteria by which local personnel are evaluated administration of local programs in infrastructure and the discipline codes aimed at ensuring and quality of life improvement. Local executives performance and accountability. Table 8.1 are entitled to design organizational structure summarizes the role of national and local including manpower planning and budget governments in public management. The allocation, control the selection process and central administration sets ceilings for total appointment as well as supervise probationary personnel costs at 40 percent of total local periods, approve promotions and transfer budgets. The Local Personnel Management personnel as needed. However, it is important Standards Commission also directs local to note that while local authorities exercise some authorities to provide for human resource autonomy in these areas, the regulations and training and for the career development of local standards which govern how local authorities go officials; however, the central administration about managing local civil servants are defined set the standards and guidelines for career by the central administration’s Local Personnel development, and provides much of the training Management Standards Commission, and and capacity development themselves. are standardized across local authorities. Table 8.1: Responsibilities in Civil Service Management Responsibility National Government Local Government Wage Policy Sets salary grades across local authorities Some discretion for merit-based pay increases or bonus within the 40% cap Wage Expenditures National budget for national civil service, including civil servants in local ad- Local budget for local civil servants ministrations (governor, district officer, headman) Job Classification National civil service standards and classifications, local civil service standards and Standards and classification Staff Accountability National accountability, local accountability Local accountability Career Develop- National civil service standards and classifications, local civil service standards Promote local civil service career devel- ment and classification opment, lower level Recruitment Approval for national and local administration appointments, sets standards Identifies potential candidates for lo- for hiring for local authorities, administers knowledge test for potential candi- cal civil service, hires within centrally dates for local authorities defined criteria and standards Relocation Within national civil service, within local administration, interprovincial reloca- Within a province for local civil service tion for local civil service Training Nationally defined standards, implementation Limited local civil service implementation Pension Scheme National civil service, personnel transferred to LAO Local civil service Source : DOLA 2008 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 60 92. In addition to setting regulations and standards they are assessed in planning, service delivery, for local civil servants, the central administration budget execution and disbursement. TAO councils continues to play a significant oversight role and executives are also subject to the oversight in public management. The Department of of the centrally-appointed district officer in Local Administration undertakes a number of a number of matters in spite of the relative responsibilities to ensure that local authorities are theoretical autonomy prescribed by the using effective and efficient public management constitution and Decentralization Act. The district in everyday administration. For example, local officer has a long history of active involvement and authorities have to pass an annual public prestige in rural settings, and the position is still administration assessment by DOLA, where treated with a great deal of respect and deference. 93. The Decentralization program sought transformed from about 12% (486,000 local to transfer personnel with resources for the employees) 76% (3 million local employees) devolved program. It was reasonably while local expenditure share rose from 17% to successful in achieving both these objectives. 40% in just three years from 1999 t0 2002 (see Local share of net central government income Eckardt and Shah, 2006, p. 263). This lackluster rose from 10% to about 25% in 2008. During the performance can partially be explained by the same period, local share of employment rose roadblocks encountered in decentralizing basic from 5% to 17.5% - local personnel size grew health and primary education services – the two from about 57,000 in 1996 to about 242,000 most labor intensive local services. The second in 2008 (see Table 8.2). This transformation is important reason is the superior security of laudable but does not compare well to a tenure and employment and retirement benefits similar transformation in Indonesia where the offered by central government employment. local government employment share was Table 8.2 : Personnel by level of government (2008) Level of government Number Percent Central and provincial administration 1,155,881 82.7% Local authorities 241,596 17.3% PAOs 13,909 1.0% Municipality 95,853 6.9% Ordinary 70,259 5.0% Teachers 25,594 1.8% TAOs 93,334 6.7% BMA 38,500 2.8% Ordinary 22,813 1.6% Teachers 15,687 1.1% Total 1,397,477 100.0% Source : OCSC 2008 61 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 94. Overall, while there has been some relaxation indicator of understaffing is faulty in the event of central controls over local hiring and firing local government contract out or have task done decisions and significant progress has been by temporary workers. Therefore, we cannot made in having adequate staffing at the local reach any firm judgment on the consistency level but much more remains to be done. of local government staffing with their Given that local governments command 25% of responsibilities as the choice of management revenues, as a rule of thumb, it is expected that paradigm determines the appropriate staffing they will have a share of public employment at level. A couple of issues which would benefit about 37.5% or more due to labor intensive from immediate attention are as follows. nature of local services. However, such an 95. Local government’s ability to hire and to qualify for an accounting, auditing or fire and set terms and conditions for local engineering positions. These examinations employment remains constrained. Such and standards are best set by relevant freedom is critical in delivering local services national professional associations. Central consistent with local preferences and being government may have a regulatory role for accountable to local residents. In Thailand these agencies. Beyond this, local government such freedom is bounded due to central should have complete autonomy in hiring and government concerns about patronage and firing decisions. These decisions should not be corruption at the local levels. However the subject to review by the central government or its latter concerns can be addressed by setting agencies and commissions but would of course eligibility criteria and professioal entry remain open to court challenges by individuals. requirements such as professio al examinations 96. As with the central administration, local accomplished by giving each local authority governments in Thailand make life-long flexibility in local hiring and firing and setting rotating appointments that work against terms of conditions of service. To attract results based accountability. The success of qualified personnel, they may have to offer local governments in industrial countries is competitive wages and benefits to selected due to the flexibility they exercise in staffing. professionals. In this they should not be Staff have specialized task based appointment constrained by central rules. The central fiscal subject to continuation based upon the rule capping local personnel expenditures is continuation of tasks and successful delivery desirable and in the long run it may encourage of desired results. Staff have substantial local administration to seek alternative service managerial flexibility but are strictly accountable delivery arrangements for more cost effective for results in service delivery. Persistent failures delivery of local services. A case can be made lead to termination. Promotion is done on a for extending the same rule to the central competitive basis and there is no possibility administration. However, the local cap may of rotation to another job within or beyond specific be raised to 50% to overcome any identified local government. Staffs are compensated understaffing. Incidentally, Brazil has a similar yet for uncertainty in tenure by having better more thoughtful fiscal rule that caps personnel emoluments. This ‘managing for results’ expenditures at 60% for local administration paradigm should be encouraged in local and 50% for state and central administration. administration in Thailand. This can be Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 62 PERFORMANCE MONITORING AND LOCAL ACCOUNTABILITY 97. Good local governance requires local participation and accountability. Individual LAOs a d m i n i s t r a t i o n t o h a v e f re e d o m a n d conduct extensive consultation on budget and responsibilities within a framework of central also have established local monitoring and oversight and local accountability. There evaluation committee for local development are multiple channels of central government plans. Bey ond gov er nment, the King oversight over local administration in place Prajadhipok’s Institute (KPI) conducts an annual in Thailand. DOLA provides guidelines on review of local government performance for its managerial and service delivery standards, Good Governance awards. Additionally, there monitors compliance of local government with is also occasional ad hoc monitoring by the financial controls, and administers “Local Quality development community in Thailand, including Management” assessments which are intended the UNDP and the Japanese International to serve as tools for organizational development Cooperation Agency. All these efforts are for LAOs. In addition, various central line laudable yet they do not yield a meaningful and agencies such as education, health and timely review of the state of local governance infrastructure have their own specific reporting in Thailand to inform policy and operational requirements from local administration.The debates. A comprehensive review of existing National Decentralization Committee monitors approaches is warranted to address the progress on a number of performance following issues. indicators for its annual awards for local 98. The Department of Local Administration thus Thailand is unable to report on general has also developed since 2005 an electronic government operations and as well as remains Local Authority Accounting System (e-LAAS). constrained in terms of fiscal transparency at the This is a full enterprise resource planning local level. The importance of data on financial system for budgetary management. However performance of LAOs cannot be understated by 2010 out of 7,853 LAOs only about 1,200 and efforts are required to establish a functional were using this system. Because of this it is not financial management system that is able to possible for DOLA to provide any consolidated report both disaggregated and aggregated financial reports on performance of LAOs and financial performance of local authorities. 99. Improving performance monitoring organization in key areas to support to strengthen local accountability entails making performance information available focus on two key interrelated objectives: in a timely fashion. At its core, performance moving from top-down compliance monitoring it a tool to support greater local oriented assessments towards basic accountability for service delivery. By focusing performance assessments which can on the two areas above, Thailand has the be easily benchmarked against similar opportunity to re-orient performance monitoring LAOs and understood by constituents; in line with this objective. Specific issues which and strengthening data collection and should be addressed include the following. 63 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 100. Local administration faces a reporting information in a coordinated manner. To obtain overload but no feedback on benchmarking such data one needs to have an appropriate performance with other LAOs. In spite of this, framework of analysis (as an example see at the present time central administration Table 9.1) and timely collection, analysis and has little timely knowledge of the fiscal dissemination of data and analysis. While health and service delivery performance we have earlier argued for the creation of an of local government. Central agencies Office of Central-Local Relations (OCLR) in and think tanks have legitimate needs for the Prime Minister’s Secretariat which would financial and operational data-such data be ideally suited to overseeing these efforts, are essential to inform policy debates and improving monitoring of local fiscal health to ensure accountable local governance. and service delivery performance need not However, to avoid duplication and overload, a wait for such an institution. Current efforts central committee having line agency and LAOs under DOLA’s LQM program can be refined membership may review all such requirements to provide useful and timely data without to come up with a plan to collect essential requiring a complete overhaul of the system. 101. Current reporting under DOLA’s be left blank. LAOs would also be responsible LQM focuses predominately on subjective for reporting basic revenues by source, and assessments of compliance with central expenditures by function, creating a complete regulations. Under the current LQM program, picture of both the cost of service delivery and LAOs are mostly evaluated on the degree to the quantity and quality received. Data would which they comply with central regulations. be self-reported annually to DOLA, which is Such assessments are highly subjective, and already prepared for such a task as it has are largely process-focused. Furthermore, teams in the field engaged in LQM monitoring they provide little basis for comparison or work. DOLA would be responsible for benchmarking against other local authorities. consolidating and organizing the data, and In order to improve the usefulness of local data making it publically available-this allows for an collection, the following steps could be taken. important accountability check, as local LQM forms should be refined to use a simple populations can ensure the self-reported data check list (yes or no) for compliance related from their governments accurately reflects items, removing all subjectivity from the reality. Data could be simply coded to allow assessment. Additionally, basic local service sorting by type of LAO (urban municipality vs performance indicators should be defined rural municipality vs tambon) and by population across the range of locally-provided public size (0-25,000; 25,000 to 50,000; 50,000- services. For example, in waste management, 100,000; >100,000). Doing so would allow LAOs could record the number of days per week DOLA to determine averages for class and waste was collected, and the volume collected. size of LAO. Benchmarking would be a simple For infrastructure, LAOs could record the exercise in looking at deviations from the mean. kilometers of roads built or repaired. Such Additionally, the adoption of tools such as citizen indicators would be defined by DOLA in scorecards can supplement this performance consultation with both central line agencies data and help to ensure the availability of (especially Education and Public Health) as channels for citizen voice, allowing the public to well as with LAOs themselves. Where LAOs influence the final outcome of a service through did not provide certain services, fields could meaningful participation or feedback. Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 64 102. Both top-down and bottom-up service delivery, it is not possible for citizens accountability is stifled because the financial to hold their respective local authorities monitoring and performance measurement accountable. This is the most glaring weakness systems are unable to consolidate in the current system and one that will be information and disclose publically. At the addressed as the systemic issues with moment information on public finances and the performance monitoring systems are performance remains fragmented and not addressed. Therefore accountability remains systematically consolidated. Without information piecemeal and based on individual accounts on public finances, public procurement, and and perceptions. Table 9.1 : A Framework for Accountability at the Local Level Responsive and fair governance Responsible governance Accountable governance Follows due process : Lets the sunshine in : • Has subsidiarity and home rule • The principle of ultra vires or general • Local government bylaw on citizens’ right competence or community governance to know • Has direct democracy provisions • The procedure bylaw • Budgetary proposals and annual • Has budget priorities consistent with performance reports posted on the Internet citizens’ preferences • Local master plans and budgets • All decisions, including the costs of • Specifies and meets standards for access to • Zoning bylaws and regulations concessions, posted on the Internet local services • Funded mandates • Value for money performance audits by • Improves social outcomes Is fiscally prudent : independent think tanks • Offers security of life and property • Operating budget in balance • Open information and public assessment • Offers shelter and food for all • Golden rule for borrowing Works to strengthen citizen voice and exit : • Has clean air, safe water, and sanitation • New capital projects that specify upkeep costs and how debt is to be repaid • Citizens’ charter • Has a noise-free and preserved • Service standards • Conservative fiscal rules to ensure environment sustainable debt levels • Requirements for citizens’ voice and choice • Offers ease of commute and pothole-free roads • Major capital projects that are subject to • Sunshine rights referenda • Has primary school at a walking distance • Sunset clauses on government programs • Maintenance of positive net worth • Has acceptable fire and ambulance • Equity- and output-based • Commercially audited financial statements • response times intergovernmental finance Earns trust : • Has libraries and Internet access • Citizen-oriented performance (output) • Professionalism and integrity of staff budgeting • Has park and recreation programs and • Safeguards against malfeasance • Service delivery outputs and costs facilities • Streamlined processes and e-governance • Citizens’ report card on service delivery • Complaints and feedback acted on performance • Honest and fair tax administration • Budget, contracts, and performance reports • Strict compliance with service standards defended at open town hall meetings • Citizen-friendly output budgets and service • All documents subjected to citizen-friendly delivery performance reports requirements • Participatory budgeting and planning • Open processes for contract bids Works better and costs less : • Mandatory referenda on large projects • All tasks subjected to alternative service • Steps taken so that at least 50 percent of delivery test—that is, competitive provision eligible voters vote involving government providers and entities beyond government • Citizens’ boards to provide scorecard and feedback on service delivery performance • Financing that creates incentives for competition and innovation • Provisions for popular initiatives and recall of • Comparative evaluation of service providers public officials • Public sector as a purchaser through • Bylaw on taxpayer rights performance contracts but not necessarily a provider of services • Managerial flexibility, but accountability for results 65 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 Responsive and fair governance Responsible governance Accountable governance • No lifelong or rotating appointments • Task specialization • Budgetary allocation and output-based performance contracts • Activity-based costing • Charges for capital use • Accrual accounting • Benchmarking with the best • General administration costs subjected to public scrutiny • Boundaries that balance benefits and costs of scale and scope economies, externalities, and decision making • Boundaries consistent with fiscal sustain- ability Source : Shah and Shah (2006, 2007) SUMMARY : TOWARDS RESPONSIVE AND ACCOUNTABLE LOCAL GOVERNANCE IN THAILAND 103. During the past decade, Thailand has envisioned by Thailand will require continued made important steps in moving from a highly refinement of the current institutions, systems centralized regime to a relatively decentralized and processes. This discussion paper has system of local governance. It has continued carried out a comprehensive overview of on course with this reform agenda in the face current efforts with a view to identifying the next of both domestic political instability and the steps in completing the desired transformation. global financial crisis. At this time, the inter- International experience suggests that Thailand governmental framework remains a system in can keep reforms on track by focusing on the transition-while some key objectives have been following three key areas. accomplished, achieving the mature system Resolving emerging tensions within the system 104. In order to ensure a ‘seamless’ integration of the Provincial Council. He/she would be of central administration and LAOs the supported by a permanent secretary appointed recommendation is to adopt a decentralized by the Center and confirmed by the Provincial unitary model of government which would be Council. Provincial Council would comprise consistent with Constitution and strengthen the elected heads of LAOs in the province local authorities. Under this model, a centrally and the chair of the council would be indirectly appointed governor would assume the position elected by the members of the Provincial of provincial chief executive for a period of four Council. All LAO heads with population above years. The appointment of the governor would, 10,000 would serve for the full term of the however, require confirmation by a majority of council whereas LAOs with population below the members of the Provincial Council. The 10,000 would serve on a rotating basis with one governor could also be removed by a no- fourth represented in any given year. confidence vote of the three-fourth majority Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 66 105. The Provincial Council would have and accountability channels – to the central legislative authority on regional functions and administration as well as the LAOs. The providing oversight on the provincial executive positions of district and sub-district officers headed by the governor. The provincial governor would transition to municipal coordination would prepare the provincial budget for officer and tambon coordination officer. approval by the Provincial Council. All legislation The LAO chief executive would assume the approved by the Provincial Council would have coordinating role with the Center and the PAO the force of the law unless overturned by an and other LAOs. This model of government act of national parliament or by courts. Local would also help alleviate tensions by clearly authorities (LAOs) would have wider powers defining roles and responsibilities for regional subject to home rule and will be considered versus local governments such that they do not equal partners with the PAO comprising inadvertently compete over the same functions. Provincial Council and the provincial executive. Reviewing and streamlining supervisory controls Central transfers will not pass through PAOs over local public financial management, local or the Ministry of Interior but will flow directly personnel management and local administration from the Comptroller General’s Department will also help to ensure a system that functions of the Ministry of Finance to individual more efficiently, subject to the proper checks accounts of local governments. All field offices and balances. central line agencies would have dual reporting Fragmentation 106. Fragmentation can be another barrier to To keep reforms moving towards the next a well-functioning intergovernmental system. decade’s mature system, reducing this Thailand currently faces some degree of fragmentation constitutes an important task. fragmentation in institutional arrangements, International experience has shown that the fiscal management and local government number of local government units may be functions. Thailand has a large number of local reduced over time using fiscal incentives to government units relative to other decentralized consolidate, altering the general transfer countries, many with populations too small to allocation criteria to eliminate the incentive make service provision economically viable. A to fragment, and imposing more demanding blanket approach to devolve responsibilities to criteria for local governments to be formed local authorities has resulted in fragmentation of and to operate. The scope of responsibilities local government functions, with smaller LAOs for different sizes and type of LAOs could also spreading too few resources across too many be refined to ensure that smaller units focus on functions. In particular, the vision of decentralized providing a few key services well-this is provision of public health and education especially relevant for the design of health and expressed in Thai legislation has been education decentralization. fragmented and incomplete remains incomplete. 67 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 Local Accountability and Performance Monitoring 107. In order for local accountability to work, would allow for a more meaningful analysis it is necessary to have functioning systems and comparison between different LAOs. for tracking local financial management and Streamlining existing upwards reporting monitoring local service delivery performance. requirements, which currently impose a heavy Such information can prove critical to inform burden on smaller LAOs, can improve the quality policy decisions, ensure good fiscal health and usefulness of data collected while freeing and uphold basic minimum service delivery resources for service provision at the local level. standards at the local level. Thailand’s ambitious Moving from a process-oriented monitoring efforts on data collection can be further refined system towards an output and outcome to yield desired results by consolidating data oriented monitoring system can strengthen collection and analysis responsibilities in a accountability and allow for benchmarking single central body. While this could eventually against other local jurisdictions. All these efforts be the responsibility of the proposed Office of will provide citizens with appropriate information Central-Local Relations, refining current LQM to hold their respective LAO accountable for use efforts under DOLA to remove subjectivity and of public funds and service delivery. orient towards key service delivery indicators Towards a mature system 108. The first decade of decentralization in appropriate performance monitoring and data Thailand has seen important strides in bringing collection systems will help to consolidate services and decision-making power closer to reforms. International experience supports the people. As Thailand moves towards the mature conclusion that refining these key areas will system envisioned in the coming decade, our help keep reforms on track as Thailand moves analysis suggests that reducing tensions in the towards truly effective, efficient and accountable system, minimizing fragmentation, and ensuring local self-government. Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 68 ANNEX 1: SUMMARY OF ISSUES AND OPTIONS Issues Options Central-Local Relations • Coexistence of institutions of centralized control with institutions • Move towards decentralized, unitary system of government comprised of local self-government leads to complexity, confusion and costly of a council of elected executives from local governments fulfilling administration—structure is incompatible with constitutional vision of legislative function with appointed governor serving as executive seamlessly integrated unitary government (subject to council majority approval) • Local governments have limited information and input into central delivery of services at local level • Ambiguity in the respective roles of institutions of central-local • Consider consolidating coordination responsibilities in Office of coordination contributes to slower progress in building capacity at the Central-Local Relations (upgraded from NDC), allow DOLA to move local level towards a more specialized role of a facilitator or enabler as opposed to its traditional role of a manager—focus on capacity building and technical assistance • Strong vision for devolved expenditure assignment in public provision • Consider asymmetric approach for public healthcare and basic of health care and education in Decentralization Act is unmatched education provision at local level in practice, threatens to undermine legitimacy of decentralization program • Overlap between expenditure assignment of PAO and other local • Clearly distinguish between those functions that overlap between local government units jurisdictions and which are best dealt with at the provincial level, and those functions which are best dealt with at a municipal or sub-district level Local Government Organization • Local administrations at the provincial level (PAOs) increasingly deliver • Implement decentralized unitary government system discussed above local functions to the relative neglect of their primary role in delivering (executive council composed of executive heads of lower tiers of regional services government with appointed governor as chair), clearly define roles of PAOs • Unitary governance structure for Bangkok Metropolitan Authority limits • Devolve municipal functions to district level while retaining metropoli- voice and choice options for local residents tan-wide functions at upper level of BMA • Local authorities are numerous, small and fragmented with inadequate • Explore opportunities for municipal consolidation, narrow focus to capacity to deliver local services priority local services • Consider introducing special grant program to provide fiscal incentives for consolidation Own source revenue and tax sharing • Local tax autonomy is weak or non-existent and undermines • Relax constraints, allow innovative financing such as bond financing accountability of local administration to local residents or public-private partnerships for infrastructure investment • Examine other financing choices such as congestion taxes, environmental taxes, etc • current guarantee for local government net income to equal not less • change to a fixed income target for local government based on total than 25% of total net central government income creates perverse net central government income excluding own source local revenues incentives for own source revenue collection efforts • Revenues from VAT surcharges may not be equally distributed across • Adopt a point-of-sale allocation criteria for VAT surcharges municipalities Intergovernmental Fiscal Transfers • Total VAT pool undefined by law and varies yearly, introduces some • Consider integrating VAT program into existing transfers, 75 percent to uncertainty, similar objectives to general purpose transfers general transfers, 25 percent to per capita specific purpose grants to local authorities with the lowest per capita GPP • Deficit component of general transfers may have adverse incentive effects • Refine urban and rural municipality share by setting total pool as fixed percentage of central government revenues. For urban municipalities, • Equalization and poverty alleviation impacts are low use 10 percent equal allocation, 90 percent share allocated by population size class of municipalities—for rural municipalities, use • Large share of equal allocation encourages fragmentation 10 percent equal allocation, 20 percent allocation based on sq km of service area, 70 percent based on population size class-include hold • Size of pool makes equity objectives unrealistic harmless, stability, predictability and sunset clauses. Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 70 Issues Options • Large share of specific purpose transfers with input conditionality • Consider replaciing specific purpose transfers with input conditionality (25% of total local revenues) limits local fiscal autonomy by less intrusive specific purpose transfers with output conditionality. • Limited focus on national minimum standards for service delivery and • Institute capital transfers to address infrastructure deficiencies—grants infrastructure should be matching, with match varying inversely with per capita own source revenues • Transfers are not linked to accountability in results • Implement output-based operating grants for national minimum standards for merit goods such as public health, education, social welfare and infrastructure—enhance accountability and incentivize performance Local borrowing • Local government’s ability to hire and fire and set terms and • Establish a framework where central guarantees of local borrowing conditions for local employment remains highly constrained are explicit, and where the PDMO carries out objective assessment of requests for local borrowing Local public management • Local government’s ability to hire and fire and set terms and • Establish a framework where central guarantees of local borrowing conditions for local employment remains highly constrained are explicit, and where the PDMO carries out objective assessment of requests for local borrowing • As with the central administration, local governments in Thailand • Encourage local governments to make contract based specialized make life-long rotating appointments that work against results based appointments. accountability • Cap on personnel expenditures is theoretically a good idea to • 40 percent cap on wages and benefits may be constraining for some minimize the risk of corruption and patronage appointments, but local governments. current level of 40 percent may be insufficient to allow space for local autonomy given capacity concerns—consider moving slightly upwards Fostering Local Accountability • At the present time central administration has little timely knowledge • Consolidate responsibility for developing appropriate framework for of the fiscal health and service delivery performance of local govern- analysis, performing timely collection, analysis and dissemination of ment data and policy implications in Office of Central Local Relations • Begin by utilizing DOLA’s LQM, refining system to remove subjectivity in assessment, identifying key indicators across local services to allow for benchmarking • Publish annual report on public finances for local authorities with details of revenues by source and expenditure by category. • Publish procurement information for supplies by service delivery unit for each LAO • Local administration faces a reporting overload but no feedback on • Build trust in upwards reporting by eliminating extraneous reporting benchmarking performance with other LAOs requirements, keeping mission critical upwards reporting, and demon- strating to LAOs that the data is being used purposefully. Allow open web based access to all for collected information and benchmarked analysis of local government performance. 71 Central-Local Government Relations in Thailand : Thailand Public Financial Management Report 2012 ANNEX A. DETAILS ON CONSULTATIONS FOR THE DISCUSSION PAPER Over the period of this analysis, the authors engaged in a series of different consultations with stakeholders from central and local government, academia and civil society. This served two important functions: first, it provided critical data and information needed for the analysis. Second, it allowed the authors to seek stakeholders views on whether the issues diagnosed were correct, which issues held a higher priority, and how best to go about addressing these issues. 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