Distributing the mechanisms and authority for managing public affairs or large enterprises to regional or local units.
The extent to which decentralization is feasible depends on the sector. Sectors best handled by local governments and financed as far as possible through user charges include both urban and rural infrastructure - roads, water and sewerage. Village-based community groups, such as water user associations in irrigation, can play a significant role in rural infrastructure. Providers of social services, such as schools and clinics, can usually be given greater responsibility for delivery and for cost recovery, although some degree of central control is needed to maintain standards and to provide targeted subsidies where necessary. At the broader level, state-owned enterprises should be granted the autonomy to cover their costs through pricing, and their managers should be accountable both for quality of service and for financial viability of the enterprise.
On financing, both local entities and state-owned enterprises will require financing other than user charges if they are to supply public goods or subsidies. Local entities can be financed locally if local governments can streamline their tax systems and broaden the base and improve the collection of property taxes through more accurate property valuation and better administration. Borrowing by local governments or state-owned enterprises may be justified for capital spending for which benefits will occur in later years, but major borrowing throughout the public sector should be subject to central approval, especially when government guarantees are given. If central government grants and subsidies are justified on equity grounds, then they should be designed to provide incentives for efficient cost recovery. Local accountability for use of borrowed funds, grants or subsidies can be increased through regular and reliable auditing by central authorities.