Focus: fiscal decentralisation

Advising the Bolivian Ministry of Autonomy and Finance on various aspects of the design and implementation of financial equalisation.

Behind the Bolivian partners' interest is the aim of the Bolivian government, as part of a fiscal pact yet to be negotiated, to reorder the financial relations between the levels of government (central government, departments and municipalities).

Support areas requested by the partner:

  1. Mechanisms of municipal and state financial equalisation
  2. Dialogue and discussion mechanisms between the levels of government for negotiating financial relations
  3. Models or methods of calculating costs resulting from the specific allocation of competencies and expenditure between the levels of government (central government, local authorities).
  4. Increase tax revenues of local administrations

Duration: December 2016 - December 2018, approximately two years

Support services:

  • Study trips
  • Moderated exchange of expertise and experience in Germany and Bolivia with experts and practitioners from Germany
  • Use of expert networks
  • Short-term assignments of German experts and practitioners in Bolivia

What has happened to date

Kick-off planning workshop in December 2016 in Germany

In early December 2016, a high-level Bolivian delegation headed by the Bolivian Deputy Minister of Autonomy and composed of members of the National Decentralisation Council, specialised staff from the Ministries of Finance and Autonomy and one representative each from the departments and municipalities, met with State Secretary of the Federal Ministry of Finance Mr Werner Gatzer, Schleswig-Holstein Finance Minister Monika Heinold, high-ranking officials of the Hessian Ministry of Finance, representatives of the German Federal Council and representatives of the German Cities Association and other German stakeholders to learn about the system and experience with financial equalisation in Germany. Following these discussions, the delegation participated in the kick-off event of the FSRP and a one-day planning workshop.

In particular, the Bolivian delegation underlined its interest in three aspects of German financial equalisation: firstly, the design of dialogue and negotiation mechanisms to negotiate agreements on financial equalisation between different levels of government and between local authorities (federal states, municipalities); secondly, principles of financial equalisation and the allocation of revenues to federal, state and local governments (municipalities/districts), as well as mechanisms of cooperation between these levels of government in collecting levies; thirdly, there was great interest in understanding which models or methods are used in Germany to assign tasks to federal, state and local governments and to calculate the costs of providing municipal services.

"Of course, we cannot and do not want to transfer Hessen's municipal financial equalisation to Bolivia, but we have certainly inspired our partners there. One finding was that regardless of the country, administration everywhere works similarly and seeks pragmatic solutions. The chances of implementation are good if a balance between the participants succeeds and there are few losers."

Peter Mandler and Dr Gerrit Rüdiger, Hessian Ministry of Finance


Expert posting to Bolivia in April 2017

Following the expert discussions and the planning workshop, the delegation members specifically asked for further guidance and support for the reform process by administrative officials of the Hessian Ministry of Finance. The reorganisation of municipal financial equalisation in Hesse in 2016 discussed at the meeting in the Hessian Ministry of Finance met with great interest among the Bolivian partners. It was decided to intensify the exchange with employees of the ministry in order to get to know the process of reorganising the municipal financial equalisation system in Hesse and to use elements of this for the upcoming process of reforming of financial equalisation in Bolivia.

In April 2017 therefore, two employees of the Hessian Ministry of Finance travelled to La Paz together with Dr Jan Werner, professor of economics at the Cologne Business School, who specialises in questions of financial equalisation. In a workshop with Bolivian central and local government officials they explained and discussed financial equalisation at the municipal level in Hesse and at state level in Germany. Working groups and case studies also provided participants with an opportunity for joint reflection on principles and options for reforming and designing financial equalisation in Bolivia. The Bolivian side thus seized this opportunity to advance their own reform considerations with new ideas. 

In July 2017 Dr Jan Werner travelled to La Paz on a second consultancy mission to hold workshops with other members of the national decentralisation council, including representatives of political levels, and to attend a meeting of the Technical Commission of the Fiscal Compact. According to current plans, Bolivia will decide on the reform of the financial equalisation in October 2017.

The participants took the following key messages home with them from the exchange with their German colleagues for further negotiations on the Bolivian fiscal pact and fiscal equalisation:

  1. Financial equalisation systems are based on the stronger sharing their wealth with the weaker. Financial equalisation systems can reduce excessive disparities of financial strength between individual municipalities, allowing them to provide an approximately equal supply of basic public services.
  2. In Germany, municipal financial equalisation contributes to the realisation of the principle of equality of living conditions, as embodied in the Basic Law. The redistributive mechanism ensures that communities with low financial strength (low tax revenues) can guarantee a minimum supply of public services to their citizens approximately equal to that of communities with high tax revenues.
  3. Functioning financial equalisation requires a ban on levelling. That is, existing inequalities in the tax strength of the communities should be appropriately evened out by financial equalisation, but not levelled completely. Otherwise there would no longer be any incentive for high-income municipalities to increase their tax potential or to tap new tax revenues.
  4. Reforming a financial equalisation system is a "mammoth task" that requires a lot of time, work and the willingness of all parties involved to compromise.
  5. The basic success of the German model is based on a functioning consensus democracy and the desire of all players involved to agree.
  6. Consistent external communication of the results of working sessions is crucial as individual public dissent hampers consensus building.
  7. The solidarity principle of the uniformity of living conditions is a key political guideline that underlies the German financial equalisation system.
  8. In Germany, the tax administration of the states collects levies for the municipalities. This cooperation is an important prerequisite in Germany for the efficient collection of revenues of the municipalities and thus also for functioning financial equalisation.
  9. The development of new tax sources such as income tax to finance the financial equalisation.

For the German officials who were in Bolivia the effort was definitely worth it.

You learn to appreciate your own administrative culture more with its grounding in rules and individual responsibility and you get a better look at the disproportionately higher demands on the administration in a country with hardly any reliable statistics and whose financial resources are not only smaller but also significantly more unevenly distributed between the regions than in Germany.  In view of the rapidly growing population, the importance of this project is likely to increase even more in the future.

Peter Mandler and Dr Gerrit Rüdiger, Hessian Ministry of Finance


Speaker of the Federal Council traveled to Bolivia in February 2018

At the partners request, Christian Rodenberg - advisor to the Finance Committee of the Federal Council - traveled to Bolivia in February 2018 for a short-term assignment. The partners had met Mr. Rodenebrg during their delegation trip in December 2016 and expressed their wish for a broader exchange with him in Bolivia. The aim of the trip was to explain to the representatives of the government and various political institutions in La Paz and the regions the intricacies of the federal system and fiscal equalization and to discuss the possibility of adaptation and implementation in Bolivia. In addition to an introduction to legislation and the federal system in Germany, it was also about the very differentiated distribution of tasks between the federal government, the federal states and the municipalities. The organization and functions of the constitutional body of the Federal Council were also explained in a lecture. Another focal point was up-to-date information on the federal-state financial relations and their reorganization from 2020 onwards.

Mr. Rodenberg held talks with members of the vice ministry of local and regional autonomies and other ministries as well as members of the national parliament of different party affiliations, members of parliament and representatives of various departments. The events in Cochabamba and Sucre were attended by local politicians.
The participants showed a special interest in

There was a special interest by the participants in building up federal structures.  Especially those participants who are more inclined towards Bolivia's opposition camp emphasized that they wanted profound reforms to ensure strong, decentralized structures in Bolivia. it became obvious that the reform process has started, but it is still at the beginning and its purpose is still largely unclear.