Impact of Decentralization on Public Service Provision

Duration: 11 months (2007)

Implemented by LGI (Local Government and Public Service Platform Initiative)

Background

Decentralization and Marketization

During the past decades transformation of the public sector in Central Europe is characterized by two parallel processes: (i) re-assignment of functions and competencies between central and local governments; (ii) increasing influence of the private sector and market based institutions on public services.

The first, the decentralization process is broader than the simple devolution of powers, as it also has political, fiscal, organizational and management aspects. The other general trend (marketization) can be characterized not only by the actual transfer of public functions to the private sector, but by a modified relationship with the market based institutions, as well. These interrelated areas (decentralisation and marketisation) of public sector transition can be evaluated along the following three dimensions:

a) How the level of level of performance, effectiveness of service provision has changed?
b) What is the impact on rational use of public funds? Economic decline in the period of transition and more strict control over hard budget constrain were the main factors for increasing efficiency of local public services?
c) How decentralisation and marketisation affected the equal access to local public services?

Importance of these three aspects of local service provision is changing over time. Decentralisation reforms were launched primarily with the strategic goal to improve the performance of public services. Higher service standards and better quality were aimed, especially in the period of fiscal austerity. Later when the consequences of specific decentralisation policies became visible, then the issues of poverty, increasing inequalities and potential losses in efficiency turned out to be the main problems.

Objectives

Assessing the Impact
This policy research project targets parallel processes of public sector transformation, decentralization and marketization, assessing the impact of both decentralization and the extended use of market based mechanisms on public service provision. The three aspects of public services will be investigated:
(i) changes in service performance;
(ii) modification of service efficiency; and
(iii) variations in disparities, impact on equity.

These questions will be raised in two selected service areas: local utility services and public education. Both of these services are basic functions of local governments in Hungary. Findings of this country example can be compared with the results of the UNDP/IMF research on public education in Poland. The lessons from studying decentralisation of urban services could be relevant primarily for countries in Southern Eastern Europe, which are in the period of transformation in this sector.

Approach and Focus

The project aims to answer some of those questions, which are often raised about decentralisation and marketisation: did decentralisation support the rational use of resources and ultimately does it lead to better service performance; how service efficiency is influenced by new forms of service provision and what are the features of differentiation in local public services.

Local public utilities
Water management is a mandatory local government service. Potable water is available at almost all municipalities and households. Waste water treatment has increased during the studied period and covers majority of households, living in urban areas.

Municipal solid waste collection and disposal became a standard local service. It is an optional local government function, but as a basic environmental service, municipal solid waste (MSW) management is a high priority for local governments. It was one of the first service areas, where market based mechanisms started to dominate service management.

Both types of local utility services are good cases for investigating the impact of decentralisation and privatisation. These services were transferred to local governments in the early period of decentralisation. Fragmented network of service organisations was accompanied with cutback in national budget subsidies, introducing the new framework of local subsidies. Municipalities enjoyed full discretion in price setting.
Local governments had a transition period of six years to decide upon the locally preferred forms of service management: they could keep the public, budgetary, in house units or they establish entities under the company law.

Within this decentralised and evolving market environment the following three sets of issues are planned to be investigated:

a) Changes in service performance and effectiveness: diversity and targeting
b) Institutional factors determining efficient service provision
c) Influence of user charges on equal access to local utility services

Activities and Methods

The project will be based on a combination of activities and research methods:
- overview of previous studies focusing on the two service areas,
- analysis of available statistical sources on service performance and finances,
- case studies and survey based comparison of local marketisation policies.

Local utility services

Sectoral overview
Local utility services are analysed from different angles: legal, environmental, financial, organisational and management. This literature and the sources of available information will be investigated in a summary paper. It will help to further refine and operationalise the research questions on the impact of decentralisation and marketisation.

Analysis of service organisations, performance and funding
Despite the fact, that the national statistics on local utilities has been improved recently, the available country-wide statistics on water and municipal solid waste management is limited. There are internal reports at line ministries, professional associations of water and communal companies, with limited access for analysis. Household survey reports provide detailed information on income and expenditure structures, but they are all national data, which cannot be disaggregated.
So information on service producers, performance and financing should be collected from various statistical sources. It will be supplemented by fiscal information, available primarily on capital grants, subsidies and public expenditures. These national datasets will help to give an overview on development trends and present status of the local utility sector.

Disaggregating data
Nationwide datasets will be supplemented by other sources of information on local utility services, like samples of selected cities, groups of service organisations and survey results. Pairwise comparison of cities with different methods of service provision will be implemented through a combination of case studies and a survey. It will focus on all the three aspects of decentralisation and marketisation (performance, costs, and social issues).

For complete information on the project visit the web site of LGI.