Ministry of economy signs agreement with CAF to stimulate fiscal decentralization in the country

Lima, June 23, 2008. To stimulate an effective fiscal decentralization plan which makes the regions, provinces and districts of the country take a more active role and promote an effective redistribution of political power at all levels of the State, the Ministry of Economy and Finance (MEF) and the Andean Development Corporation signed a technical cooperation agreement under the name "Program of Assistance in Fiscal Policy to the Government of the Republic of Peru."

During the signing of the agreement, speakers emphasized the importance of achieving an efficient and equitable allocation of resources, a correct distribution of revenue and an improvement in the efficiency and sustainability of expenditure which results in better and greater use of regional and local capacities and opportunities.

The agreement will be implemented in two years with technical advice from consultants from the Andrew Young School of Policy Studies (AYSPS) of Georgia State University. The program is divided into three major components:

1. Training in subnational public management
2. Analysis and redesign of inter-governmental fiscal relations and their impact on territorial equity and
3. Inter-municipal cooperation for provision of public services.

The first component trains professionals in the public administration in aspects of fiscal decentralization and public investment processes to increase outlays and the quality of investment at regional and local level. As a result they will be able to assist with implementation of regional development plans, with the objective of facilitating growth of local economic bases to improve internal financing. The Lambayeque and Junín regional governments are the pilots for implementing this objective.

The second component focuses on analyzing and offering three important reform scenarios:

1. The country’s inter-governmental fiscal relations, which involves examining the scope and current state of implementation of the Fiscal Decentralization Law, and estimating the expenditure needs for transfers of functions and competences from the Central Government to regional and local governments.
2. The tax collection potential of municipal governments, which will result in reform proposals, including fundamental aspects such as municipal tax administration and options for treatment of tax evasion at local level; and
3. Local borrowing, which will make fiscal rules more flexible.

Finally, the third component will assist with implementation of laws which promote the formation of regions.

The signing of this technical cooperation agreement will help create a new institutional framework for the decentralization process, not only fiscally sustainable but – above all - consistent with the specific characteristics of Peru. It also aims to make a sustainable improvement in the quality of life of the population by assigning responsibilities to regional and local governments in an effort to reduce inequities and imbalances.