IPS-English PERU: Fiscal Decentralisation Could Fuel Inequality, Say Analysts
 
Date: Mon, 21 Apr 2008 15:42:30 -0700

 
Milagros Salazar

LIMA, Apr 21   (IPS)  - Regional governments in Peru are pressing
for a fiscal decentralisation process that would give them greater
autonomy in collecting taxes and boost their share of revenue, especially
in mining and agricultural export regions.

But experts warn that decentralisation could lead to an increase
in inequalities as well.

”The transfer to the regions of functions along with funds is indispensable
for moving ahead with the decentralisation process, and what would
be a better way to achieve that than by allowing the regions to directly
collect taxes themselves,” the head of the National Assembly of Regional
Governments (ANGR), Yehude Simon, told IPS.

Simon met earlier this month with Prime Minister Jorge del Castillo
to define the participation of regional authorities in drawing up
a plan to kickstart the process.

Simon said that in his meeting with del Castillo, it was agreed that
representatives of the Economy and Finance Ministries and regional
governments, along with other experts, would begin the process of
drafting a proposal in the last week of April.

Peruvian President Alan García promised the country's governors on
Apr. 1 that he would support the fiscal decentralisation process,
which he considers necessary to encourage greater cooperation between
regions in order to pave the way for joint investment projects.

The next day, Economy Minister Luis Carranza said the plan could
be ready in three months.

”We have to see which revenues will be subject to coparticipation,
what transfers will be made, what are the chances of regional and
local governments falling into debt, etc. We have to move forward
on this decisively, but in a very orderly manner,” said the minister.

Analysts, however, are calling for closer scrutiny of the pros and
cons of fiscal decentralisation. One of the positive aspects of the
process that is mentioned is the possibility of regions enjoying greater
autonomy when it comes to spending and investment. But experts also
point to the risk of exacerbating inequalities.

A study by the INDE Consultores consultancy found that only six of
the 26 districts into which Peru is divided (25 regions and the province
of Lima) would see an increase in tax revenues as a result of decentralisation.

These six regions -- Lima, Callao, Arequipa, La Libertad, Pasco and
Ica -- would benefit because of their high levels of productive and
industrial activity in areas like export agriculture and mining, according
to the study commissioned by the ANGR, which is based on official
statistics from 2006.

The change in the fiscal structure would thus accentuate the gaps
that already exist between the regions as a result of the distribution
of mining concession fees, since only a handful of regions currently
benefit from such payments from foreign mining companies, which are
riding high as a result of soaring minerals prices.

According to a 2007 study by the Grupo Propuesta Ciudadana, a coalition
of non-governmental organisations, more than 60 percent of the revenue
coming from the mining industry, most of which involves concession
fees, is concentrated in Ancash, Tacna, Cusco, Cajamarca and Moquegua.

”We must take into consideration that the inequalities created by
the concession fees are not only between regions but within the regions
themselves, which means internal inequalities should be addressed
first,” Nilton Quiñones, a Propuesta Ciudadana expert on the mining
industry and decentralisation issues, told IPS.

To illustrate, he pointed out that 45 percent of the revenue taken
in by the central region of Ancash in concession fees and other payments
is concentrated in just one of the region's 20 provinces, Huari.

”In such cases, the central government would have to somehow compensate
the regions that are unable to cover their annual budget through direct
tax collection, to prevent inequalities from growing,” said Simon.
”But it is important to begin, at least with a pilot region, in order
to effectively implement the decentralisation process.”

Quiñones maintained that what the García administration is currently
doing to compensate for the imbalance in revenues is using ordinary
funds as a political weapon, rather than based on technical criteria.
He argued that the government does not provide explanations as to
why it decides to cut the budget for one region or another, and where
the funds are to be rechanneled.

Luis Arias, a former head of the tax administration (SUNAT) who headed
up the INDE study, told IPS that the most feasible option would be
to create a system in which the national government would continue
collecting taxes but would establish funds with the revenue collected
in each region, in order to distribute it according to the needs of
the population and the social indicators in each area.

To do that, said Arias, the first step would be to draw up a map
showing what companies contribute depending on the province where
they actually operate, instead of where their headquarters are located,
to assess production levels in each region.

According to the principle of fiscal domicile, Lima and Callao concentrated
89 percent of domestic taxes in 2006. But if that principle is left
aside, the proportion received by the capital and the nearby port
city would be cut almost in half, according to the INDE report.

The head of Propuesta Ciudadana's Vigila Perú monitoring programme,
Epifanio Baca, also believes that intergovernmental transfers should
first be put in order, ”to make the system more transparent and fair.”

In second place, said Baca, local governments should collect a greater
amount of taxes in a more efficient manner through an agreement with
SUNAT that would guarantee responsible spending.

With a more realistic fiscal map, every district, with the exception
of Lima and Callao, would show larger figures than those reported
by SUNAT today, although the amounts would still not be sufficient
to cover their budgets.

The amount of tax revenue in Huancavelica, for example, would be
140 times larger than the current figure. The impoverished region
requires much more money than what it now receives from the national
government to meet the huge unfulfilled needs of the local population.

Nor would Apurímac and Ayacucho, two other poor highland regions
where the official poverty rate stands at 89 and 75 percent of the
population, respectively, benefit from the changes.

”Fiscal decentralisation will grant the regions greater autonomy
in their spending and in investment decisions, and will make the regions'
revenue flows more predictable. But if the decentralisation process
is not carried out properly, most of the regions could end up underfinanced,
and only a few would benefit,” said Quiñones.

In Arias' view, ”fiscal decentralisation is not in and of itself
an instrument for promoting development and combating poverty. There
are other aspects that must be taken into account as well.”

”Until regions are joined together so that they can jointly work
to reduce inequalities, the only thing fiscal decentralisation will
do is generate unequal conglomerates,” said the former head of SUNAT.


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+ PERU: Government Generosity Swells Mining Company Profits (http://ipsnews.net/news.asp?idnews=41061)


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