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WHY THIS PRINCIPLE?

To define appropriate intergovernmental fiscal arrangements which determine to a large extent sub-national government financial capacity to invest.
Choices regarding sub-national transfers, own revenues and borrowing should reflect good practice, fit a country’s institutional context and align with policy objectives. This may allow in certain cases for different fiscal arrangements across different territories (at least in a transitory manner) in order to better fit with the variety of local situations/capacities.

To encourage sub-national governments to play an active role in investment and development.
Higher levels of government should set enabling conditions for sub-national governments to be able to exploit their own revenue-raising potential to finance investment, to ensure financing for long term operations and maintenance, and to participate in co-financing arrangements.

To align priorities and generate positive spillovers across levels of government.
Co-financing schemes should be more than a way for sub-national governments to secure funds. They can help to ensure the commitment of different actors to the success of a project and create collective ownership; to align investment priorities across levels of government; or to incite sub-national authorities to engage in projects with positive spillover effects or to pool resources with neighbours.

IN PRACTICE

• Link the use of earmarked and matching intergovernmental grants to positive spillovers and/or the need to align investment priorities across levels of government (this can be done through specific conditionalities) (national level).
  
  
• Review the incentive effects of transfer arrangements to ensure adequate incentives for sub national governments to maximise own-revenues (national level).
  
  
• Ensure timely, predictable transfers between levels of government (national level).
  
  
• Minimise the variance between estimated and actual transfers (national level).
  

PITFALLS TO AVOID

• Create fiscal gaps or unfunded mandates, linked to mismatch between allocated competencies and resources to fulfil the mandates.
  
  
• Often change the rules in transfers, that prevent sub-national governments to have long-term visibility on revenues – a key pre-condition for public investment.
  
  

GOOD PRACTICES

‌‌‌‌	See real life examples on how countries have been putting this principle into practice. Read more

COUNTRY PROFILES

SELF ASSESSMENT QUESTIONS