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A Concept Paper:

The role of equalization grants in playing a fundamental role in the

design of the system of intergovernmental transfer and promoting the
autonomy of local governments.
By Md. Zahurul Islam;

1. Public service like health, education, welfare and infrastructure are important for the
well-being and, for providing equal opportunities of the local citizens. The primary role
of equalization grant is to reduce the differentials in fiscal capacity and expenditure
needs of the local governments. It is assumed that equalization system should
provide similar levels of service delivery at similar level of taxes.
2. Part one: why the role of equalization grants in playing a fundamental role in the
design of intergovernmental transfer system. Since it is assumed that the
equalization systems play the role of promoting equal opportunities for the peoples
well being, reducing disparities in opportunities at present circumstances and
providing essential public services at reasonable quality. Why government gives
equalization grants? Answers can be found in three ways:

First, equalization grants are unconditional grants given for general purposes.
In absence of equalization transfer, local governments often would have
insufficient resources to fulfill their responsibilities to minimum desired level
(by national standard). In particular, equitable grants are important as they
typically provide as sizeable share of overall local government resources.


Second, equalization grants reduce horizontal fiscal imbalances (fiscal

disparities across different local governments) in a country and inequities by
compensating local governments with greater fiscal needs and smaller fiscal


Third, equalization transfers are an important fiscal tool because they can be
used by governments to pursue selective complementary objectives.

3. The fiscal resources of a central government budget come from different sources,
partly from the taxes on incomes generated in the municipalities. A key question is
how to divide the resources going to the municipalities from the central budget? It is
good practice to transfer resources to municipalities based on a clear formula. For
example, South Africa uses an equitable share formula to provide transfers from
central government to local government like,
Grant= (BS+D+I-R)+/-C
Where BS is the basic services component, D is the development
component, I is the institutional support component, R is the revenue
raising capacity correction, C is a correction and stabilization factor.
Here, the basic services component is to enable municipalities to
provide basic services(water, sanitation, electricity, waste removal and
other basic services), including free basic services to house hold those
earning is less margin.
4. As the design of equitable grant are based on the expenditure needs (BS+D+I) and
the ability of local governments to levy taxes/revenue potentiality(R), So equitable
grants can be best way to transfer funds for those municipalities have small tax base
and relatively higher public services cost.

5. Part two: why the role of equalization grants in promoting the autonomy of local
governments more importance in designing intergovernmental transfers. Before we
discus about different grants with its characteristics like,

Unconditional grant: No conditions attached to use; lump sum.

Equalization grant: No conditions attached to use; lump sum; based on
fiscal capacity and expenditure needs.
Conditional Non-Matching grant: Has to be spent on specific functions;
lump sum.
Conditional Matching grant: Has to be spent on specified functions;
municipality is required to match with specific contribution.
Grant for Cost reimbursement: Fully/ party reimbursed by central
government for certain approved costs of municipality.

6. Local government must have a minimum degree of control over their own sources of
revenue. Local governments that lack independent source of revenues can never
truly enjoy fiscal autonomy. They are under the financial thump of the central
government. Without revenue autonomy there will be little accountability of local
governments to local residents.

7. As the Equalization Grant is unconditional type and local governments can use this
grant for equalization and most often general purposes. So, it can be provided local
governments with substantial amount of policy discretion and fiscal autonomy.
In addition, as the central government transfers resources to local governments to
pursue a variety of objectives so, from this perspective transfers can be designed for
equalization purposes.

Source References1. Board way R. 2004. How well is the equalization system reducing fiscal disparities? ,
Queens University. Kinston, Ontario.
2. World Bank Institute ,Jorge Matinez -Varquiz& Jameson Boxes The designing of
Equalization grant :Theory & Application
3. Lars Erik Borge ;Local Equalization grants; Purpose , Efficiency, effects and design.
4. Guide to Municipal Finance, UN Habitat for a better urban future, Nirobi 2009
5. World Bank Institute, Municipal Finances: Module 01- Intergovernmental Finances in
a Decentralized World,.