The Reformed Financial Mechanism Governance and Architecture

1. The Reformed Financial Mechanism Governance and Architecture Benito Müller, Luis Gomez-Echeverri,

2. The Reformed Financial Mechanism (RFM) Institutional Architecture Funded Activities Key Design Principles UNFCCC Conference of Parties (COP) External Audit COP Authority RFM Administration Subsidiarity Executive Board Expert Advisory Panel(s) (as required) Independent Oversight Administrative Services (UNFCCC Secretariat) RFM Trustee Thematic Assessment Units (one per disbursement window) Internal Monitoring and Evaluation Secretariat Services International Level National Level Climate Change Fund (CCF) Direct Access Legend: Governance Relation (‘under the authority of’) Contractual Relation (MOU or contract)

3. The Reformed Financial Mechanism II Section I. Political Oversight Benito Müller, Luis Gomez-Echeverri, Saleemul Huq, and Achala Chandani

4. Scope of Work Package Part 1. National Case Studies China India USA Switzerland Part 2. International Case Studies The GEF Trust Fund The Montreal Protocol Multilateral Fund The Kyoto Protocol Adaptation Fund The Global Fund The World Bank Climate Investment Funds

5. National Case Studies: Questions Two questions: What is the relationship between the Legislative and the Executive Branch in the central budgeting process? How is central funding distributed to sub-national entities?

6. The US budgeting process begins with the formulation and the presentation of the President’s financial proposal to Congress • Congress is under no obligation to adopt all or any of the President's budget and often makes significant changes. • The only influence of the LB over the budgeting process is though the threat of a Presidential veto of Appropriation Bills • The Federal Council (EB) submits the draft budget to parliament • The Parliament has full rights to amend the draft budget; the only constraint is the debt containment rule, which sets a ceiling on overall expenditures. The federal budget consists of about a thousand line items and the parliament can decide on the level of each of it. Parliament is not only able to amend line items but it can also cancel them or introduce new ones.

7. According to the Indian Constitution, the Union Finance Minister is responsible for preparing the Annual Financial Statement (the budget), and present it in parliament. • The estimates of expenditure from the Consolidated Fund included in the Annual Financial Statement and required to be voted by the lower house of parliament (Lok Sabha) are submitted in the form of Demands for Grants. • On completion of its budget discussions, the Lok Sabha passes the annual appropriations act, authorizing the executive to spend money, and the finance act, authorizing the executive to impose and collect taxes. The Lok Sabha cannot increase the request for funds submitted by the executive, nor can it authorize new expenditures.

8. ‘Step one up’: central government agencies (for example the Ministry of Education/Health) prepare initial budget proposals, which are compiled in a bottom-up process from their subordinate spending units and then submitted to the Ministry of Finance. • ‘Step one down’: Relevant departments of the Ministry of Finance, conduct a preliminary review of these initial budget proposals from the line ministries and other central government agencies. The Budget Department of MOF reviews the initial budget proposals from a broader perspective, balances competing resource needs and produces a tentative consolidated budget for the central government as a whole, which is submitted to the State Council. This is the basis for the budget ceilings set by the State Council, which are then communicated by the Ministry of Finance to all the central government agencies in order to begin step two of the process. • ‘Step two up’: The central government agencies draft a detailed organizational budget, based on the approved budget ceilings, and submit it to the Ministry of Finance. • ‘Step two down’: The Ministry of Finance consolidates the budgets submitted by the central government agencies and then prepares a summary budget with aggregate budget lines for submission to the State Council for review and approval • The budget is then sent to the National Peoples Congress (LB) for review and approval

9. Legislative v. Executive Branch: The right to micro-manage the budget L E L E

10. (Re-) Distribution of Central Funds: China & India CHINA In 1995, a transitional transfer payment system was introduced with the aim to establish an objective, normative transfer mechanism transferring funds to poor regions. The payments are allocated on the basis of a transitional transfer formula, defined with reference to: • the fiscal strength of the locality; • the success of the province in revenue collection; • political considerations – priority is given to ethnic minority, revolutionary and border regions. INDIA Finance Commission The Finance Commission of India provides recommendations on the distribution of taxes from the Centre to the States. In its tax sharing formula, the Finance Commission takes into account the factors such as population, income distance, area, tax effort, fiscal discipline, and an index of infrastructure. Distribution of Central Assistance for State Plans: The Gadgil Formula The Annual and Five Year Plans of the States of India are supported by Central Assistance. The States are entitled to receive Normal Central Assistance from the Union Government. Initially, Central Assistance was allocated without reference to an allocation formula. Responding to a general demand for an objective and transparent allocation of Central Assistance for State plans, the 'Gadgil formula' was adopted during the Fourth Five Year plan (1969−74):Population in 1971 (60%); Per capita income (25%); Performance (7.5%); Special problems (7.5%), at discretion of the Planning Commission.

11. (Re-) Distribution of Central Funds: US & Switzerland USA ? • Switzerland • Switzerland has a long-standing vertical fiscal equalization system (Finanzausgleich), which has recently undergone a fundamental reform. Under the new system, financially weak cantons receive unconditional payments to equalize financial strengths (‘resource levelling’) and financial needs (‘burden compensation’) between the cantons. • taxable income of individual taxpayers, • earnings from taxable assets of individual taxpayers, • taxable profit of firms, • Levelling of resources is hence used solely for the redistribution and clearly separated from other allocation objectives (such a compensation for mountainous terrain) that are covered under the heading of ‘burden compensation’