Viewpoint Lacking in Arguments on "Trinity" Plan for Decentralization

KITAMI Tomitaro
Consulting Fellow, RIETI

Decentralization Discussion Failing to Boost Public Interest

Discussion on the decentralization of government authority is now in the final stage. In its meeting on April 1st, the government's Council on Economic and Fiscal Policy agreed that a specific "trinity" reform plan concerning the allocation of three major financial resources - government subsidies, local allocation tax, and transfer of tax sources from the central government to respective local governments - should be drafted quickly. However, simply transferring local governments' tax sources and delegating administrative power do not guarantee the realization of effective local administration. If local governments are inferior to the central government in cost-performance, the decentralization would result in an increase in overall administrative costs.

In the ongoing debates over the "trinity" decentralization, both of the Ministry of Public Management, Home Affairs, Posts and Telecommunications and the Ministry of Finance stress the need to improve the efficiency of local administration through outsourcing and computerization of administrative procedures. However, they have neither made in-depth discussion concerning to what extent local administration can be improved by such measures as computerization and outsourcing, nor have they examined the possibility that the existing restrictions may be impeding local governments' effort to improve the efficiency of administration.

To this day, accumulated public debts held by the central and local governments total ¥700 trillion. Given this reality, whatever debates there are over decentralization, unless the government spells out how administration can be improved by it, to the eyes of the general public they would appear nothing more than a tug of war between the central and local governments over taxation sources. Uncertainty surrounding this point is a reason behind the lack of public interest in the ongoing decentralization discussion.

How to Induce Innovations in Local Administration

Many local governments are moving to introduce a "new public management (NPM)" model, an electronic government and other means to improve the efficiency of administrative procedures. These innovative measures, however, are being adopted only in the peripheral areas of administration, such as inner management, procurement and back office operations. Law enforcement, which is the core part of local administration and accounts for some 60 percent of procedures handled by prefectural governments, is still being carried out in an old-fashioned manner characterized by application and notification, approval, and investigation and order; a flow of procedures that has remained intact since the Meiji Era (1868-1912).

This rigidity is due to the existing laws and regulations that only permit administrative procedures relating to law enforcement to be carried out in such a manner. This should be changed, however, to allow local governments to introduce innovative steps in law enforcement which are in line with the advance of telecommunications and other technologies; since the function of law should be the effective control of social phenomena which are consistent with policy goals. In areas where critical information tends to be locked in by insiders, there are cases in which control of the people by the people - such as protecting internal informants and establishing rules for exemption from liability (leniency program) - is more efficient than government control through notification requirement and administrative investigations. Also, there may be areas in which checks by rivals and not-for-profit organizations (NPOs) is expected to be effective, complementing checks by government authorities; that is, if online application and notification information is shared by both the public and private sectors. Furthermore, by objectifying and making transparent the government's criteria of discretion, paperwork in many areas - including those involving the exercise of public authority - can be processed electronically or outsourced as routine procedure.

Such innovations in law enforcement by local governments would have no chance to emerge as long as the government implements and enforces restrictive measures designated by laws of the central government. Although it is important to keep rules stable, from the viewpoint of ensuring the predictability of rules, this does not contradict attempts by various rule makers to induce innovations through competition and trial-and-error. By replacing the current nationwide uniform regulation by central government with diverse regulations based on local government ordinances, decentralization can set out an institutional platform to induce innovations in administrative procedures. The omnibus law on decentralization enacted in April 2000 abolished the "agency delegated function"(ADF) system, an arrangement under which the central government had authority to mandate local governments to implement its delegated functions, and established two new functions - "self-governing functions" and "statutory entrusted functions" - in place. In principle, the law allows respective local governments to set and implement their own ordinances and bylaws for those administrative procedures which are defined as a self-governing function. This sounded like it could have become an institutional platform from which to facilitate innovations in law enforcement. In reality, however, such ordinances and bylaws can only be formulated as long as they, "do not contradict laws," thereby leaving local governments with little room to improve the efficiency of law enforcement through the introduction of their own ordinances and bylaws.

Let me introduce one example. The Dental Hygienist Law consisting of 52 articles stipulates that the minister of health, labor and welfare holds jurisdiction over administrative procedures for dental hygienist examination as well as subsequent issue of license and registration. Of all the procedures, the biennial notification of name and address by registered hygienists is defined as a procedure self-governed by each prefectural government under the supervision of its governor, according to the third paragraph of Article 6 of the law. Entrusted only with such fragmentary subcontract work, which nevertheless involves substantial time and workload, prefectural governments have no way of improving the efficiency of procedures with a new ordinance or bylaw.

There are numerous similar cases in which local governments are unable to take advantage of their self-governing functions because the central government retains principal control and authority transferred to them is, as a result of its fragmentary nature, a hindrance to innovation. Likewise, innovative moves are hampered when the stipulations of law are so rigid and meticulous on procedural methodologies that local governments are left with little room to make change by enacting an ordinance or bylaw. In addition, it must not be overlooked that the current local fiscal system centering on local allocation taxes - under which a local government is entitled to receive a certain portion of state funds disregarding whether it improves its efficiency or not - is discouraging self-propelled efforts by local governments to improve efficiency.

Such government-to-government regulations and the local fiscal system should be reviewed to quickly create an environment that facilitates competition among local governments in innovative ideas and enables them to enforce law and regulations in accordance with the needs of respective regions.

In doing so, roundabout approaches, such as replaying the lengthy discussion made at the time of the formulation of the omnibus decentralization law, must be avoided. Instead, drastic legislative steps should be taken - such as establishing a general principle that specific methods and details shall be laid down by a relevant ordinance, thereby allowing local ordinances to override law. The existing systems of local allocation tax and local government bonds, which are serving as a disincentive for local governments to make efforts to secure revenue sources on their own and select projects based on the managerial point of view, also need to be corrected.

Credit should be given to the government's Council for Decentralization Reform for tackling some difficult issues, such as the integration of "yochien" kindergartens and "hoikuen" nurseries (two types of institutions serving similar functions but supervised by different ministries) and the creation of local self-governing committees for agricultural affairs. What is required more in the ongoing decentralization discussion, however, is to set straightforward goals in instituting reforms across-the-board, rather than going deep into specific issues. By presenting clear-cut goals, the government would be able to elicit public interest in and support for decentralization.

Restoration of "People's Governance" to Realize People's Discussion on Decentralization

Classical arguments on decentralization set forth a hypothesis called "voting with feet"; the idea that people consider the various conditions offered by different jurisdictions in deciding where to live. Today, peoples' governance through ballot box voting may be losing substance. However, by creating an environment that facilitates competition among local governments in offering diverse administrative services, thereby enabling people to choose where to live, a new form of people' governance would be set in place with voting with feet playing a supplementary role to ballot box voting.

In order to restore people's governance, it is necessary to clarify: (1) to what extent efficiency of local administration can be enhanced through innovations, provided that institutional obstacles such as government-to-government regulations are removed; (2) how people can assess and differentiate between local governments which are keen on innovation and those which are not; (3) how to build in incentives for innovations within the local fiscal system.

In an attempt to answer these questions, I have compiled data entitled "Inventory Schedules for Local Administrative Reform". The outline of the data is as follows.

Simply put, the schedules list local governments' standard administrative reform goals by project, together with data on typical local government's administrative costs using simplified activity-based costing analysis (ABC analysis).

The schedules were compiled in the following three steps.

The first step is the full cost accounting of each of the standard routine works handled by local governments (220 types of works handled by prefectural governments and 107 by municipal governments). This is, in other words, to put a price tag on each work. This is full cost accounting, thus the price includes overhead costs such as labor and debt service costs both in direct and indirect departments. Continuing expenditures and planned future expenditures are excluded.

The second step is the ABC analysis of each routine work. This is to examine by what types of activities each of the priced routine works are carried out. As a result of the high-cost of conducting a full-fledged ABC analysis, a simplified ABC analysis was performed utilizing estimated equations based on the composition of budgetary items and relevant laws and regulations.

The third step is to estimate, based on the results of the simplified ABC analysis, the cost reduction effect created by computerization, outsourcing, and deregulation. In other words, the maximum discount on policy prices that can be realized by administrative reform was calculated.

The most distinct feature of the schedules is that they are based on the project cost estimation for "standard groups," which is defined as a prefecture with a population of 1.7 million or a municipality with a population of 100,000 (This data is published annually in "Chiho-Kofuzei Seido Kaisetsu: Tan-i Hiyo Hen ((Exposition of Local Allocation Tax System: Unit Price))". This data and that on each government agency's action plan for computerization of administrative procedures are the sole sources for Inventory Schedules for Local Administrative Reform). This means the following three things.

First, the schedules enable the assessment of aggregated cost reduction effects for local governments nationwide. The estimation of local allocation taxes is based on local financial plans - estimated revenues and expenditures for local governments - formulated annually by the central government for the following fiscal year. The types of routine works listed in Inventory Schedules for Local Administrative Reform are basically identical to those used in the government's local financial plans. Therefore, the nationwide cost reduction effect of administrative reform can be easily derived from figures estimated by utilizing these schedules. Conversely, it is possible to determine a target amount by which total local allocation taxes can and should be reduced without changing policies included in a budget plan, but by changing the way of implementing them.

Second, the schedules provide a benchmark in comparing 3,300 local governments across the country in their performance. The actual budgetary plan of each local government is basically a reduced or enlarged copy of the budgetary plan of a standard local government. Thus, by using the standard local government as a yardstick, local governments can be compared with each other, for instance, in cost performance in implementing an identical project as well as in efforts to reinforce regional identity through self-financed projects. It would be possible to create a benchmark with which people can evaluate each local government and specific methods to do that are now being studied.

Third, it becomes possible to link each local government's administrative reform efforts to the distribution of local allocation taxes. In order to promote local governments' administrative reform efforts, it is effective to have a built-in institutional mechanism to reflect reform efforts in the distribution of local allocation taxes. Inventory Schedules for Local Administrative Reform, which are based on the same data sources as those used in calculating local allocation taxes, can bridge reform efforts and local allocation taxes. Specific ways to achieve this are being studied, too.

Here, let me briefly introduce some estimations made on the cost reduction effect of computerization, outsourcing and deregulation based on the schedules.

The results of this estimation show that overall administrative costs incurred by prefectural governments - excluding expenditures on police and schools, for which the number of staff is designated by law - can be reduced by ¥649 billion, which represents 17 percent of ordinary expenditures, except for transfer expenditures. The amount is based on conservative estimates of reduction effects derived by computerization, outsourcing and other measures. Therefore, a greater reduction can be achieved through each local government's innovative and ingenious efforts.

Meanwhile, should restrictions over the number of police officers and teachers - as imposed under the Cabinet Order of the Police Law, the law concerning standard class formation, and the number of teachers and officials at public schools providing compulsory education (hereinafter referred to as the standard law) - be abolished and reforms similar to those seen in other areas of administration implemented, the overall reduction in local governments' administrative costs would amount to ¥2.8221 trillion, according to the estimation results.

Municipalities, which tend to provide more direct services than prefectural governments, have even greater room for improvement. The estimation results show that their aggregated costs of administration other than those relating to firefighting operations can be reduced by ¥1.8814 trillion (10 percent of ordinary expenditures, excluding transfer expenditures), while the administration costs including those for firefighting operations can be reduced by ¥2.3346 trillion.

Altogether, administration costs - other than those for police, firefighting and school operations - in prefectures and municipalities nationwide can be reduced by ¥2.53 trillion if law-imposed restrictions over local governments are eased and each local government tries to improve efficiency through computerization and outsourcing. This amount is equivalent to 1 percent of consumption tax revenues. More drastic deregulation that includes police, firefighting and school operations would enable the reduction of ¥5.16 trillion, an amount exceeding the scale of tax revenue sources proposed for transfer to local governments under the government's trinity reform plan, or the Katayama Plan named after the home affairs minister.

All the above amounts have been derived by adding up figures on a micro basis. The estimates, however, would be no exaggeration on macro basis. The unit cost (adjusted for price changes) of local allocation tax swelled by 1.44 times over the period of the bubble economy. But it is strongly suspected that the unit cost (unit administrative cost) had been padded up so that the aggregated amount of local allocation taxes would not decrease drastically amid the continuous natural increase in tax revenues. Given such a supposedly inflated fiscal structure of local governments, if the level of unit administrative cost and the necessity of administrative task are reviewed against this backdrop, a reduction even greater than that estimated above may be possible.

Certain assumed coefficients have been used in the estimation and these assumptions need to be reviewed and adjusted to the actual state of local administration. However, even with such constraints taken into account, the estimation results strongly suggest the need to create an environment that facilitates competition among local governments to improve administration with innovative ideas before discussing the transfer of revenue sources from the central to local governments.

To make decentralization a people's issue, not an issue discussed within a closed circle of some central and local government officials, the ongoing debate centering on revenue sources as proposed by the trinity reform plan is not enough. Policy proposals for administrative reform, which are formulated from the standpoint of restoring people's governance and would bring about visible results, are what should be presented.

May 6, 2003

The "Inventory Schedules for Local Administrative Reform" (available only in Japanese) can be downloaded from here. The schedules were presented at the first meeting of RIETI study group on public governance and received useful feedback from each member of the group. I would like to express my thanks to Mr. Mitsunari Ishida, a research assistant, for his considerable help and cooperation in compiling the schedules.

May 6, 2003