(Repeat for additional subscribers)
Jan 9 (The following statement was released by the rating agency)
Fitch Ratings has updated its Institutional
Framework for Subnationals in Peru. The framework for local and regional
governments (LRGs) is still at an early stage and evolving despite significant
devolution to the local level. There is still a need to clarify the functional
spending responsibilities of each tier of government.
The decentralization process in Peru commenced in 2002 and after 10 years the
process is in some respects relatively advanced; the legal framework covers most
aspects of the system of intergovernmental fiscal relations, and subnational
governments have become important players on fiscal policy. Subnationals now
concentrate a growing quantity of public expenditure decisions and they
represented over 44% of total general government non-financial expenditure in
Fitch believes that the institutional framework has a number of strengths
compared with its international peers, including tight control and monitoring of
indebtedness by the central government and a solid level of transparency. There
are a number of prudential regulations in place which limits the level of
liabilities at all tiers of subnationals. These regulations are necessary in a
developing institutional framework system as the local debt management capacity
is still unsophisticated.
In addition, there are regular reporting requirements and high transparency in
relation to subnational budget execution and debt levels. Subnationals are
required to submit budget settlement data to the national Ministry of Economy
and Finance. This data is published on the ministerial website. In addition,
subnationals have to produce a multi-year Fiscal Management Report which needs
to include the actual performance measured against target and prudential
regulations and projections for the following three years.
Nevertheless, there are some weaknesses in the Peruvian subnational
institutional framework, including the lack of fiscal flexibility by LRGs. The
local tax base and rates are established and determined by the national
government. The lack of flexibility makes subnationals wholly reliant on
decisions taken at the national level with little accountability to the local
population or the ability to increase fiscal revenues in case of need.
Furthermore, the equalization revenue system does not fully take into account
the different costs of providing the services. In light of the limited level of
devolved responsibilities this is not a major problem. However, if large
responsibilities, such as the provision of health care, are devolved a failure
to factor the costs of providing these services into the equalisation mechanism
could lead to cost pressures, particularly in remote regions with widely
dispersed populations. Also the assignment of revenue-sharing, in the form of
the minin and and other royalties do not help address horizontal fiscal
disparities among subnational governments because these revenues accrue
exclusively to LRGs located in mining producing areas. As a result there is a
wide fiscal imbalance among producing and non-producing areas.
The special report, entitled 'Institutional Framework for Peruvian
subnationals', is one of a series of Fitch reports examining the institutional
frameworks for subnationals in various countries which are available on the
agency's website at www.fitchratings.com.
Link to Fitch Ratings' Report: Institutional Framework for Peruvian Subnationals