Revisiting urban governance structures in China

In the view of the OECD Secretariat, based on the experience of OECD member countries, China would benefit from revisiting its urban governance structure, to facilitate the process of urbanisation. Strengthening collaboration across levels of government would be a first step,10 as would exploiting potential complementarities across jurisdictions and sectors. This would entail, among other things, revamping the metropolitan governance structure and improving the quality of the regulatory framework.

Strengthening collaboration across levels of government

A new relationship between central and sub-national levels of government is required ...

China could benefit from a collective commitment across levels of government to enhance the central government’s stewardship role with sub-national governments, as “partners”, rather than “subordinates”. This new relationship would involve strengthening the collective commitment11 of sub-national governments, to ensure coherence between national and sub-national objectives through consultation and dialogue. This could encourage “buy-in” and successful policy implementation at lower levels of government. Co-ordination and co-operation at the central level, and ongoing consultation with the sub-national level, could help identify needs and capacity, and open channels of information for monitoring and evaluating policies. This would also help provide subnational governments with the capacity and tools to implement policy and ensure that competences and resources are aligned.

This new relationship between central and sub-national governments would entail greater clarity in defining roles and providing adequate resources across government levels. It would also support accountability in sub-national governments. The appropriate division of responsibilities and resources across government levels would encourage the agencies responsible to ensure adequacy, equity and efficiency in allocating resources for essential public services, in line with national policies.

... based on a streamlined distribution of competences and a reduction of transaction costs

Setting up and clarifying responsibilities for expenditure across all levels of government could go a long way towards improving co-ordination across levels of government and facilitating more efficient provision of basic public services. According to the World Bank (2014b), it is desirable that a national government assume responsibility for national public services, international affairs, monetary policy, regulation, transfers to persons and businesses, fiscal policy co-ordination, regional equity, redistribution, and preservation of an internal common market. Some central functions, such as the regulation of the financial sector and the environment, may be effectively shared with sub-national governments. State governments, or in other words, provincial governments in China, may have primary responsibility for education, health, social insurance, intermunicipal issues and oversight of local governments. All local services should be assigned to local governments. Generally, the central government should be involved in overall policy, setting standards and auditing; state governments should have an oversight function; and local governments should be involved with the provision of infrastructure and services. Assignment of responsibilities to various local governments may be asymmetric, based on population size, rural/urban classification and fiscal capacity. Large cities may have responsibility for some services that are provided directly by the centre in other cities.

The experience of OECD countries shows that designing a clear-cut allocation of competencies across levels of government is a highly complex process. Many services and policy areas such as urban development require the intervention of all levels of government, given the inherent interdependency. In addition, the assignment of government responsibilities is not always appropriate, either because of overlaps in responsibilities, or because some policy domains are not specifically assigned to any level of government and require co-operation. Co-ordination mechanisms and multilevel governance arrangements are key, both vertically between the centre and the lower levels, and horizontally among the constituent units. This reduces transaction costs and asymmetries of information across levels of government12.

Chinese authorities may also consider establishing a decentralisation framework that includes the scope, objectives, dimension (administrative, economic, fiscal, and territorial), stages and the timeline for decentralisation. This legal framework would regulate the relationships of different levels of government. France’s Laws of Decentralisation and Reform of the State (Lois de decentralisation et de reforme de I'Etat) provides an illuminating example of how to clarify the roles and responsibilities of the different levels of government and offer public actors the means to implement government priorities efficiently. China may also wish to reassign selected responsibilities that are currently under the scope of county-level governments to higher levels of government better suited to carrying them out. For example, the financing and provision of security services (pension, disability and survivor benefits and unemployment) could be re-centralised at the provincial or central level, which have a broader view, wider scope of action, and generally more technical capacity. Chinese authorities may wish to analyse the decentralisation experience of the Netherlands (OECD, 2014d). The Dutch de Grave Commission’s Report “It is Your Business or Not” calls for a better distribution of tasks across levels of government and streamlining earmarked grants in policy areas involving several government levels (OECD, 2011d).

Introducing a new relationship across levels of government and enhancing decentralisation would require new mechanisms of accountability. Sub-national governments could be provided incentives to properly balance spending on economic development and construction and on other public services, especially in social protection. Central ministries are encouraged not to impose unfunded mandates on subnational governments, as such mandates and sudden changes in policy generate confusion and uncertainty for sub-national governments’ long-term capital planning and budgeting (Mikesell et al., 2011).

Communication and information channels to facilitate collaboration need to be reinforced

Given the importance of sharing and access to timely and accurate information, it is in China’s interests to establish mechanisms for information, both vertically and horizontally. In OECD countries, national bodies in charge of sub-national co-ordination, involving meetings of sub-national representatives, are most frequently used to coordinate regional development across different levels of government. OECD (2013i) has noted that the greater the degree to which sub-national governments need to secure central government support for their investment priorities, the greater their incentive to remain informed about the agendas of central-level policy makers. China may draw on the experience of Norway, a more centralised country, in information sharing. Norway’s Ministry of Local Government and Modernisation meets with regional administrations and other regional stakeholders to inform them about the central policies for regional development and to discuss key regional issues. China could benefit from a central body to facilitate communication across levels of government. This need not be at ministerial level, as in Norway, but an agency under the umbrella of the National Development and Reform Commission (NDRC), China’s chief central planning agency. Its primary tasks would be to explain to sub-national governments what the central policy priorities are and to facilitate dialogue among regional leaders. Meetings with leaders of different provinces could encourage networking. The body could also conduct research on the direction of sub-national government’s structure, tasks and finances. Sub-national leaders would find it in their interests to participate, to obtain first-hand information on the central government’s strategic priorities.

Another relevant example is France’s Ministry of Decentralisation, Reform of the State and Public Function (Ministere de la decentralisation, de la reforme de l’Etat et de la fonction publique) which plans and implements government policy on decentralisation in co-ordination with the Ministry of the Interior and the Ministry of Housing and Territorial Equality. This proposes the measures to ensure that local governments can exercise their functions. It also prepares the strategic orientations of government for the development of metropolitan areas.13 Canada’s Privy Council Office has an office for intergovernmental affairs that provides advice and support to the prime minister and minister of intergovernmental affairs on policies, communications and parliamentary affairs regarding federal-provincial-territorial relations, including fiscal federalism, the evolution of the federation and Canadian unity14.

Performance budgeting could be used as a co-ordination tool ...

Performance-informed budgeting could help China define clear objectives, align financial and performance information and develop a common whole-of-government planning and reporting framework that could be a valuable tool for co-ordination. In performance-informed budgeting, resources are related to proposed future performance or to performance results in an indirect manner. Performance information is used to inform budget decisions along with other information on macro restrictions on fiscal policy and political and policy priorities, but there is no automatic linkage between targets and funding. OECD countries have long experience in performance-informed budgeting that could be relevant for China. Canada, for instance, sets strategic outcomes for all entities and links resources, performance and actual results for all programmes; the United Kingdom’s comprehensive spending reviews and public service agreements help allocate funding to key priorities and help departments plan ahead; and the United States’ Program Assessment Rating Tool assesses how programmes are performing.15

Alternatively, China could explore co-financing arrangements between central and sub-national governments. This is not simply a way to secure funds, but an important coordination tool to ensure that national priorities are reflected in regional development projects. Such arrangements can help ensure the commitment of different actors to the success of a project. They could also encourage sub-national governments to engage in projects that generate positive spillover effects on neighbouring areas; and help shift spending priorities of other actors, particularly when linked to new activities. Moreover, co-financing arrangements are an important way to spread risk, which allows greater latitude for experimentation.

... and performance management can help align central and sub-national objectives

Performance management tools could help China align central and sub-national governments’ urban development objectives. This can boost co-ordination across levels of government. One option is the use of strategic planning frameworks at the whole-of- government level and within individual public sector organisations, to ensure that the government’s agenda is clearly translated into a work programme with measureable outcomes for each ministry and agency. Measuring performance and using performance indicators are key for aligning central and sub-national objectives, promoting learning and orienting stakeholders towards results.

China has long experience of measuring performance and publishing results as a way to foster economic growth. It could build on this experience to use performance management not only as a way to rate performance but to strengthen collective commitment. Individual performance objectives of each sub-national government could be linked to a shared whole-of-government approach, starting with ministries at central level and cascading down through the public administration. The aim would be to clarify how sub-national objectives and activities are contributing to the strategic objectives of central government on urban development. To support China’s efforts in improving its performance management practices, the experience of Chile’s Management Improvement Programme (MIP) may be of particular relevance (Box 3.4). The main message for China is that the improvement programme has to evolve, so this should be part of a long-term vision of how the government can support the urbanisation process. The MIP is also closely managed, like other instruments of the Management Evaluation and Control System, with a clear articulation of processes, timetables, tools and responsibilities.

Box 3.4. Chile’s Management Improvement Programme

Chile’s Management Improvement Programme (MIP) aims to improve management in public agencies, to link salary policy to performance, and to provide information to inform budget decisions. It links three policy areas, state modernisation, human resources and the budget. Its relationship with the budget is both general, in increasing efficiency and containing levels of spending, and specific. Three of the 11 MIP systems (planning and management control, financial and accounting administration, and public sector procurement) directly support the budget process. The MIP’s planning and management control system is central to results-informed budgeting: it establishes management information systems that define and monitor performance indicators. It also informs wage policy, linking the wage-bill envelope to performance.

The three spheres of government policies in the MIP

Source: Budget Directorate of Chile (DIPRES) (2014), www.dipres.gob.cl/594/w3-propertyvalue- 15230.html (accessed 11 November 2014) and World Bank (2010), Performance Management Chilean Style: The Management Improvement Program (PMG)._

The challenge for China is to ensure that the performance information from municipalities complies with minimum standards of quality. Another problem is that its complex and diffuse governance system could make collecting data on performance inaccurate, unreliable and incomplete. The National Bureau of Statistics (NBS) of China will need to call for more regular performance data to be published and communicated to central government. The main impact of performance indicators is their ability to reinforce linkages among policy stakeholders at different levels of government, and their contribution to learning and capacity building. As a basis for dialogue, discussion and learning, they help communities of actors identify common reference points. NBS will have to lead a project on building municipal performance indicators. Performance information facilitates the dissemination of information across levels of government, helping actors identify objectives and improving strategic effectiveness. This could be of particular importance to China in enhancing co-operation and accountability.

To improve the collection of performance data, China may wish to review the experience of the Norwegian programme KOSTRA (Box 3.5). The programme has had various benefits for the central and sub-central levels of government. At the central level, the system has rationalised data collection and processing, and established uniform standards that facilitate comparisons of municipalities and service sectors. It has also helped the central government determine whether municipalities are complying with national standards and regulations, and facilitated assessment of economic conditions. This served as the basis of Parliamentary discussion on the transfer of resources to municipalities. In municipalities, KOSTRA has reduced the administrative burden of reporting. It also has provided a tool for internal planning, budgeting and communication at the local level. In addition, it has facilitated knowledge-sharing among municipalities, which use its indicators for the purpose of benchmarking performance. The system, which publishes results electronically, can provide data within a month of their receipt from the municipalities.

Box 3.5. KOSTRA, Norway’s data reporting and information system

The Norwegian system KOSTRA represents an OECD-area best practice. KOSTRA (Local governments- State-Reporting) is a national information system that provides information on the use of resources by the municipal and county authorities. The system is based on data records and annual reports to Statistics Norway by local authorities. The data includes financial data and data on service provision. Statistics Norway compiles these with other data, such as population figures, and generates key figures for priorities, coverage rates and productivity/efficiency regarding public services. The key indicators are published online in a format that makes it possible to compare resource use by similar municipalities. The comparisons help local authorities identify areas where resources can be used more effectively.

KOSTRA integrates information from local government accounts, service statistics and population statistics. It includes indicators of production, service coverage, needs, quality and efficiency. The information is easily accessible online and facilitates comparison of the performance by local governments, the media and researchers. While individual local governments could use KOSTRA more efficiently (e.g. by systematic benchmarking), the system has helped municipalities in “bench-learning” or “bench-marketing”.

Source: KOSTRA (Local governments state reporting) (n.d.) www.regieringen.no/en/dep/kmd/subiects/municipal- economy/kostra-municipality--state-reporting.html?id= 1233 (accessed December 2014); and OECD (2010), Finland: Working Together to Sustain Success, OECD Public Governance Reviews, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264086081-en.

Conditionality could help align objectives and foster accountability

To step up its efforts to reinforce vertical accountability, Chinese authorities may wish to include conditionalities in transfers to sub-national governments. Conditionality is a well-established policy tool for vertical co-ordination across OECD countries. It is a type of contractual arrangement whereby a government takes, or promises to take, certain policy or institutional actions, in return for which a higher level of government authority or an international institution will provide specified amounts of financial and/or technical assistance (OECD, 2013i). Conditionality is relevant for regional development because it is at the heart of intergovernmental fiscal relations. It has been used in many intergovernmental relationships, including co-ordination of investment for regional development. The use of conditionalities varies across OECD countries. The most frequent conditions attached to central funding include matching (co-financing) and reporting requirements, as well as predetermined timeframes for spending investment funds. In many countries, earmarking, environmental assessments and additionality requirements are also frequently applied. By using conditionality requirements, the Chinese central government could direct sub-national governments towards crossmunicipal participation as a condition for supporting a project.

Although many other OECD countries acknowledge widespread and significant difficulties in the use of conditionalities (OECD, 2013i), China could use them as a mechanism of co-ordination, as they are perceived by the large majority of OECD countries as being very effective in increasing the quality of investment projects. Several countries (e.g. Estonia, Italy and the Slovak Republic) have found them to be effective tools for framing policies and strategic planning, enabling the central level to better understand the local conditions. In Italy and Norway, conditionality has successfully encouraged the concentration of resources, making it easier to promote and anticipate measures deemed crucial for regional development (OECD, 2013i). To ensure that objectives are aligned, China could follow the example of other OECD countries in using performance monitoring. In Italy, for example, this has been positively enforced through a performance reserve that awards regions that perform with additional grants, based on pre-identified indicators and targets.

Conditionalities should not be part of the contract agreement signed between Chinese sub-national leaders and the upper-level government. They should be part of the financial transfer instruments. For example, in Germany, conditionality has been explicitly attached to central government transfers. However, the regular sectoral conferences bringing together representatives of the centre and the regions can allow regional authorities to discuss and engage in the central government’s policy objectives.

China may need conditionality mechanisms in inter-governmental transfers to reduce the risks posed by elite groups, clientelism and insider-outsider problems. Chinese subnational governments need to be accountable to higher levels of government to carry out their assigned tasks, but they also need to be accountable to citizens, the clients for their investments and services. To ensure that sub-national governments are accountable, China may condition transfers to certain matching or co-financing requirements by the sub-national level. It could also attach conditions such as consultation with citizens, as Poland does.

 
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