Intergovernmental Fiscal Transfers in Developing Countries: Case Studies from the Commonwealth is the fifth title in the Commonwealth Secretariat Local Government Reform Series. Each book in the series distils contemporary thinking and international good practices from around the Commonwealth. They offer guidance on various aspects of local government reform to public sector policy-makers, senior managers at central and subnational levels, as well as students and researchers in public administration with an interest in local government issues. The Secretariat’s policy research in local governance endeavours to provide cutting-edge evidence for the design, implementation and review of public policies, and also contributes to the broader development agenda.

Transfers – a term referring to the flow of resources from the higher governmental tiers to the lower levels of government – are a feature common to all developing and developed countries, the global evidence being that with the exception of singletier governments, no government functions, or can function, without a system of intergovernmental transfers. Transfers are a key constituent of local government finance, funding on average 70–72 per cent of local government expenditures in developing countries and 38–39 per cent in developed countries. In recent years, transfers have emerged as an important instrument in strategies for strengthening decentralisation. In several countries, transfers have evolved for reasons that are not explicitly acknowledged in theoretical literature.

Increasingly, it is being realised that provision of certain services such as health, education, water and sanitation can be more suitably provided by subnational governments, since they are closer to local preferences. Over the last quarter of century, more than 75 countries have attempted to decentralise the responsibilities of national government to the lower tiers of government (Junaid and Shantayanan 2005: 1). Motivation for decentralisation varies across countries and includes political1 and economic transformation, transition to democracy, or a response to ethnic or regional conflict.

This chapter discusses the theory of intergovernmental transfers (IGTs) and a typology of these grants, and provides an overview across Commonwealth countries. This is followed by a comparison of trends in OECD and developing countries.

This chapter examines the intergovernmental transfers (IGTs) structure in India, comprising transfers from the central government to the state governments and from the state government to the local governments. It begins with a discussion of the historical context of IGTs and then examines the current decentralisation framework. It concludes by setting out what works well and less well in terms of the decentralised framework in India.

This chapter examines the case study on the local governmental finance framework in Kenya, with a focus on IGTs. It begins with a discussion of the historical context of the municipal structure and then examines the current decentralisation framework. This framework includes the functions to be carried out by subnational governments and the funds available for these activities. A detailed overview of particular IGT funds in Kenya is included. The chapter concludes by setting out the strengths and weaknesses of the decentralised framework in Kenya.

This chapter presents the intergovernmental transfer structure in the United Kingdom (UK) in order to draw lessons for developing countries. It also provides an overview of the decentralisation framework and finances to the four countries in the UK.

Australia operates under a federal system with three different levels of government. These include the Commonwealth Government, the state and territory governments and local councils (Australian Government 2011a). There are six states in Australia: New South Wales (NSW), Queensland (QLD), South Australia (SA), Tasmania (TAS), Victoria (VIC) and Western Australia (WA). In addition to the states, there are two mainland territories: the Australian Capital Territory (ACT) and the Northern Territory (NT; Australian Government 2012). The various levels of government are each run by a democratically elected council or parliament. The main transfer of funds is from the federal level to the states, territories and local governments. There is also some provision of funds from the states to local councils (Parliamentary Education Office 2012).

With an increasing focus on decentralisation to ensure the provision of basic services, the importance of undertaking efficient and effective intergovernmental transfers (IGTs) has been receiving increased attention across countries. However, while the theory defines optimal mechanisms for IGTs, these mechanisms have been challenging to design and implement in practice, particularly in developing countries. The case studies on India and Kenya highlight some of these challenges.