This chapter assesses the institutional and fiscal capacity of subnational governments in Peru to effectively carry out their policy responsibilities. It examines the distribution of tasks and competences across levels of government, and analyses the key enablers of subnational capacity, with a focus on addressing under- or unfunded mandates. Core areas of analysis include the structure and adequacy of subnational public finances, tools and incentives to strengthen institutional capacity at regional and municipal levels, and the implications of territorial fragmentation for governance and service delivery. The chapter concludes with recommendations to reinforce subnational capacity, improve co-ordination, and ensure that responsibilities are matched with the appropriate financial and institutional means.
Regional Development Policy in Peru
Abstract
Since Peru enacted its Law of Bases for Decentralisation in 2002 (see Background section), the decentralisation process has led to significant transfers of powers and responsibilities to both regional and municipal governments. Although the initial plan was for these transfers to be gradual and contingent on subnational governments having the necessary administrative capacity, a new government in 2007 initiated a “decentralisation shock,” which resulted in the rapid and substantial transfer of expenditure responsibilities, even in the absence of accredited capacities. Subnational governments were required to pledge to enhancing their capabilities in order to receive these responsibilities, a modality known as “competencies to be developed” (por potenciar). By 2009, 39% of the transfers had been made under this modality. Since then, regional and municipal governments have taken on key expenditure responsibilities for areas crucial to regional and local development, such as education, public health, economic affairs, and transport. According to the Decentralisation Secretariat, as of 2023, 94.3% of the functions established in the Organic Law of Regional Governments had been transferred to regional governments, with additional tasks assigned through related legislation (Secretaría de Descentralización, 2023[1]; Secretaría de Descentralización, 2024[2]; Official Gazette Law No. 27867, 2002[3]).However, while Peru has made strides in decentralising political powers and administrative responsibilities to its regions, progress in fiscal decentralisation has been limited. This is particularly evident for regional governments, whose fiscal autonomy was intended to hinge on the merging of several departments (departamentos) in 2005. Specifically, the proposed funding system for regional governments was to include half of the tax revenue collected by the national government within their territories, apart from corporate income taxes. However, since none of the departments agreed to merge in the 2005 referendum, regional governments continued to operate within the same departmental boundaries and under the same funding regime, which remains largely dependent on national government transfers, as discussed below.
Yet, the commitments on decentralisation taken in 2002 have been systematically reflected in other policy documents throughout the past two decades, such as the General Policy of Government 2016-2021 (Política General de Gobierno) and that of 2021-2026, which present the political priorities for each legislative term. However, the General Policy of Government 2021-2026, while outlining broad short-term objectives on the topic of decentralisation under its fifth axis, lacks a clear medium- to long-term action plan with defined goals and an implementation roadmap. In response to this gap, the Decentralisation Secretariat has begun working on a National Multisectoral Decentralisation Policy (Política Nacional Multisectorial de Descentralización). This initiative, considered “a public issue” and “a national priority” in their relevance analysis (Secretaría de Descentralización, 2022[4]), aims to provide a more structured approach. In February 2024, Peru released an in-depth analysis outlining the conceptual framework and methodology for developing this policy. This study will be instrumental in shaping the new policy, as mandated by national regulations governing policy design. To conduct this analysis, the PCM organised 24 meetings over the course of 1.5 years, which included interviews, fact-finding workshops, and high-level fora. These meetings engaged a wide array of stakeholders, regional and local government representatives, civil servants at all levels, civil society organisations, academia, and technical experts from across most regions of the country. Moving forward, it will be essential to ensure that these studies inform the policy’s formulation, engaging all relevant stakeholders to secure consensus and ensuring that implementation takes place without any major challenges.
Division of tasks and responsibilities at the subnational level
Peru is a unitary state with two tiers of subnational government: 25 regions (24 departments and the Constitutional Province of Callao) and 1 891 municipalities (196 provincial municipalities and 1 695 district municipalities) (INEI, 2023[5]). As a result of the ongoing decentralisation process, regional and local governments enjoy political and administrative autonomy over matters within their jurisdiction (Table 5.1).
In Peru, there are two types of municipalities: provincial and district municipalities. While both are self-governing and independent of each other, they share very similar responsibilities. However, provincial municipalities have an additional co-ordination role across the district municipalities within their province, which is composed of multiple districts. Furthermore, provincial municipalities are subdivided into populated cores (centros poblados), approximately 2 900 across the country These populated cores are established by the provincial municipality upon the request of a peasant or native community with over 500 adult inhabitants and a clearly defined geographic area to manage. Populated cores hold elections under the supervision and assistance of the provincial municipality, and their elected representatives manage only those competences explicitly delegated to them through a provincial ordinance. Finally, the Metropolitan Municipality of Lima (Municipalidad de Lima Metropolitana, MML), with the status of a provincial municipality, has been granted additional powers and functions, similar to those of regional governments, since 2011 under a special regime. As a result, the legislation governing regional governments also applies to the MML (Official Gazette Law No. 27795, 2002[6]).
Since 2016, there have been several legislative amendments to the Organic Law of Regional Governments (Official Gazette Law No. 27867, 2002[3]) and the Organic Law of Municipal Governments (Official Gazette Law No. 27972, 2002[8]). In 2016, an amendment to the Organic Law of Regional Governments assigned a formal role to the National Assembly of Regional Governments, officially recognising it as the representative body for all regional governments (Official Gazette Law No. 30482, 2016[9]). In 2023, both the regional and municipal government laws were revised to allocate specific resources to the Regional and Municipal Councils, enabling them to hold their respective executives accountable and monitor the use of public funds (Official Gazette Law No. 31812, 2023[10]). Most recently, in 2024, articles 52 and 73 of these laws were modified to include responsibilities related to fisheries and aquaculture. Notably, the exact same responsibilities and language were applied to both regional governments and municipalities. Moreover, the law mandates that these responsibilities be funded from the existing budgets of regional and local governments, without requiring any additional resources form the national public treasury (Official Gazette Law No. 32096, 2024[11]).
Despite the successive amendments transferring responsibilities to subnational governments, the distribution of competences remains unclear, leading to potential overlaps and inadequate funding allocations. For instance, in the education sector, regional governments are tasked with “formulating, approving, executing, evaluating, and administering regional policies for education, culture, science and technology, sports, and recreation,” while local governments are responsible for “designing, executing, and evaluating the educational project within their jurisdiction in co-ordination with the Regional Education Office and the Local Education Management Unit and contributing to national and regional educational policies with an intersectoral action focus” (Official Gazette Law No. 27867, 2002[3]; Official Gazette Law No. 27972, 2002[8]). Similarly, in the area of environmental protection, the approval of the Framework Law on Climate Change in 2018 meant that both regional and local governments were tasked with implementing national climate change policies, redesigning regional climate strategies, and incorporating mitigation and adaptation measures into their strategic documents, among other responsibilities (Official Gazette Law No. 30754, 2018[12]). This law led to amendments in the Organic Law of Regional Governments and the Organic Law of Municipal Governments, with local governments being charged with formulating, approving, implementing, and monitoring local environmental and climate change plans and policies. This is done in accordance with regional, sectoral, and national policies, regulations and plans (Official Gazette Law No. 27972, 2002[8]), while regional governments were granted shared responsibility for ensuring the “sustainable management of natural resources, improvement of environmental quality, and climate change management”, without clearly delineating what this shared responsibility should entail (Official Gazette Law No. 27867, 2002[3]). Importantly, the law stipulates that these newly assigned responsibilities are to be funded through transfers from the national government, but it does not specify the criteria that will determine the amount allocated to each subnational government (Official Gazette Law No. 30754, 2018[12]).
Policy levers to support subnational institutional capacity
Building institutional capacities has been a longstanding priority for Peru. Already in 2014, it designed and implemented the National Plan for the Strengthening of Capacities for Decentralised Management 2014-2018 (PCM, 2014[13]), which articulates the strategies and actions linked to the strengthening of competencies at the three levels of government for the exercise of modern, decentralised, effective and efficient management. In 2017, recognising that skilled personnel at all levels of government are crucial for reaping the potential economic and political benefits of decentralisation, the Sub-Secretariat for the Strengthening of Decentralised Management was established under the Decentralisation Secretariat of the Vice-Ministry of Territorial Governance.
In 2021, Peru enacted a comprehensive civil service reform aimed at improving the efficiency and equity of public sector employment (Official Gazette Legislative Decree No. 1602, 2023[14]). The reform’s primary goals are to better plan the civil service, gradually eliminate disparities in hiring, remuneration, and the rights and duties of civil servants across the country and strengthen human resource offices. A key element of the reform is the introduction of job families, or groups of positions with similar functions and characteristics. These job families will help ensure that the necessary skills are present within the civil service. To determine what job families are needed, the law requires each public entity to map the skills they need and plan requesting or delivering capacity-building trainings to achieve them. The job families include experts in areas such as planning, institutional management, dispute resolution, public policy formulation, implementation, and evaluation, service delivery, and budget and tax management, among others. The reform also introduces a performance evaluation system to improve accountability and outcomes. Although the reform will be implemented gradually over a maximum of six years since 2021, it is irreversible and will apply to all levels of government, though participation will remain voluntary for some civil servants, accounting for 17.5% of the total public sector workforce. Nevertheless, as of September 2024 only 3 007 public servants (0.2%) had transitioned into the new system (OECD, 2024[15]; MEF, 2024[16]).
Beyond this law, multiple policy measures have been adopted to address low administrative capacity. With the main objectives being fighting corruption and increase budget absorption for current and capital expenditure, the National Authority for Civil Service in Peru (Autoridad Nacional del Servicio Civil, SERVIR) passed Law 31912 in 2023 known as Con Punche Gerentes, which enables the use of the Management Support Fund by regional and local governments to pay for the salaries of highly qualified public servants that move to the regional and local government to share their expertise and build the capacities of regional and local civil servants (Official Gazette Law No. 31912, 2023[17]). As of August 2023, this programme had provided funding to six regional governments and 55 local governments to hire 115 highly qualified civil servants in regional governments (MEF, 2023[18]), with 200 more joining other subnational governments in 2024. SERVIR also grants study loans to government professionals under any type of contract to carry out master’s or doctoral studies at the best universities abroad. The programme offers discounts on loan repayments subject to the return of the student to the public administration in Peru1. However, this programme has attracted professionals mostly from Lima and, only marginally, from other regions.
The Plan for the Development of People (Plan de Desarrollo de Personas, PDPs) is a planning tool that seeks to structure strategically any capacity-building activities to strengthen the skills of its staff oriented to the fulfilment of the institutional strategic objectives. Since 2018, human resources offices within ministries, regional governments, and municipalities have been legally required to develop annual PDPs using a methodology provided by SERVIR (Official Gazette Legislative Decree No. 1025, 2008[19]; SERVIR, 2016[20]). Each PDP begins with a training needs assessment that prioritises skill gaps and allocates a budget accordingly, based on available resources. However, SERVIR has found that many entities, particularly local governments, struggle with this assessment due to limited staffing, skills, and resources. In response, SERVIR introduced the 2023-2026 Action Plan for Capacity-Building Management in Local Government, aiming to simplify the PDP process by standardising priority areas for training, offering free training programs to address budget constraints, and providing ongoing technical assistance to resource-limited municipalities (SERVIR, 2023[21]). Simplifying the capacity-building request process has become crucial: between 2016 and 2024, only 1 204 of Peru’s 2 799 public sector entities (43%) approved a PDP at least once. Of these, 249 are at the national level (21%), 309 at the regional level (26%), and 646 at the local level (54%). Where standardisation efforts have already been implemented, SERVIR estimates a reduction of more than 20% in identified knowledge gaps. For instance, among municipalities that participated in the training session on “Ensuring the Quality and Sustainability of Water and Sanitation Service Provision,” 37% subsequently expanded their water service coverage. Similarly, 31% of municipalities that attended the “Comprehensive Municipal Solid Waste Management” training went on to establish a Solid Waste Management Plan, despite not having managed such a tool in the year prior to the training (OECD, 2024[15]).
Despite these efforts, support in areas such as budgeting or investment management remain highly demanded: in 2021, for instance, 666 of 1 890 municipalities considered that they require technical assistance for the formulation and evaluation of public investment projects, and 393 of them considered that they need more training in results-oriented budgeting. To close these capacity gaps, the Ministry of Economy and Finance, in particular the Directorate-General for Multiannual Investment Planning, in charge of the National System of Multiannual Programming and Investment Management (also known as Invierte.pe, see Chapter 5) has organised several trainings, including one detailing all steps to do properly the Multiannual Investment Programming (MEF, 2022[22]). The Ministry of Economy and Finance, with ProInversión and the National School of Public Administration, also carried out a specialised training programme in aspects related to the process of promoting private investment for the development of infrastructure projects and public services, management of public-private partnerships (PPPs) and active projects, and execution of public investment projects through the programme “Works for Taxes” (Obras por Impuestos) (MEF, 2022[23]). Other trainings have been developed by other ministries such as on citizen engagement and accountability by the PCM (PCM, 2014[24]), capacity-building programme for regional and local governments on disability issues by the Ministry of Women’s Affairs and Vulnerable Populations (CONADIS, 2021[25]), capacity-building programme for regional managers and civil servants on the promotion of local employment opportunities through the Entrepreneurship Guidance Service by the Ministry of Labour and Employment Promotion (MTPE, 2021[26]).
Many institutions have established deconcentrated offices to ensure technical assistance and capacity-building on the ground. SERVIR, through the National School of Public Administration and in collaboration with local universities, launched the Regional Classroom (Aula Regional) with support from the Government of Canada under the Modernisation Programme of Civil Service. This initiative brings capacity-building trainings to regions most in need, facilitated by experts from the national government, academia, and other public administration bodies. The first session, held in Cajamarca in August 2024, focused on promoting and protecting the fundamental labour rights of public servants (SERVIR, 2024[27]). Beyond this, ministries such as the Ministry of Economy and Finance and the Ministry of Social Development and Inclusion, alongside the National Statistical and Informatics Office (Instituto Nacional de Estadística e Informática, INEI), provide continuous technical support. The INEI operates 26 deconcentrated offices, with 15 serving as capacity-building centres for civil servants, regional officers, and ARD personnel. The INEI’s Departmental Co-ordination Committee plays a key role in disseminating best practices and organising joint activities across regions.
Regional and local governments receive much technical support for their planning activities, particularly from the National Centre for Strategic Planning (Centro Nacional de Planeamiento Estratégico, CEPLAN) and the Agency for Investment Project Studies and Design (Organismo de Estudios y Diseño de Proyectos de Inversión, OEDI). CEPLAN has developed various methodological instruments to guide planning and the articulation of public actors, emphasising a territorial approach to policymaking. CEPLAN does not design policies or decide on priorities but accompanies the process by providing the methodology and ensuring that priorities are properly aligned. It has also created Geo Ceplan, a territorial data platform that regional and local governments can use to gather the information they are most likely to need to undertake their strategic planning activities. This platform provides prospective information for the development of future scenarios and the undertaking of SWOT analyses. It also offers current information on indicators on tangible and intangible assets, existing gaps, economic activities, etc. CEPLAN seeks to systematise data collection for these indicators and, in the upcoming years, move towards the automation of territorial assessments. On the other hand, OEDI intervenes at the request of subnational governments to provide support in the elaboration of technical files required to assess the viability of an investment project and access the necessary lines of financing (OECD, 2024[15]).
Peru has made strides in collecting data to monitor and evaluate public service delivery by subnational authorities. In May 2023, a law was passed to implement the Integrated Platform for the Electronic Management of Human Resources, as part of the Administrative System of Human Resources Management (Sistema Administrativo de Gestión de Recursos Humanos, SAGRH). Once launched, it is expected that this platform will enhance transparency and strengthen human resources management across all levels of government, combating corruption and promoting efficient use of public resources (Official Gazette Law No. 31742, 2023[28]). Among other things, the platform will consolidate data on public employment contracts and on civil servants, including their educational background, work experience and skills, and disciplinary records (El Peruano, 2023[29]).
Subnational government finances
An examination of subnational government finances reveals that Peru’s subnational governments carry out an important part of total expenditure in contrast to other unitary OECD countries (Figure 5.1). Yet, subnational government expenditure as a share of the general government in Peru is much higher than that for tax revenue, suggesting a low level of revenue autonomy of subnational governments, and the existence of vertical fiscal imbalances. By contrast, subnational governments are responsible for a higher proportion of public investment (61.8%) than the OECD average for unitary countries (see Chapter 5). The subsections below provide a more detailed analysis of the various aspects of subnational government finances.
Note: *Averages for unitary OECD countries.
Source: OECD calculations based on (OECD, 2023[30]). For Peru, (IMF, 2024[31]).
Subnational government expenditure
The level of Peruvian subnational government spending accounted for 34.3% of general government expenditure in 2021, which was 6.5 percentage points above the OECD unitary country average (27.8% respectively). However, subnational government spending as a percentage of GDP was lower in Peru than in the OECD unitary country average (8.3% and 12.8% respectively).
Figure 5.2 provides a breakdown of subnational government expenditure in 2021. The largest share is allocated to education (26.1%), a significant responsibility for regional governments where it represents 46.5% of their total spending. This is followed by health (16.6%), planning and management (11.9%), and transport (10.6%). Over time, subnational governments have dedicated a larger share of their budgets to education and, particularly, health, with increases of 0.5 and 3 percentage points since 2015, respectively.
Although direct comparisons are difficult due to the lack of standardised subnational expenditure data by functional classification (COFOG), a rough equivalence can be made. If health, planning and management, and transport are approximate equivalents for the COFOG categories of health, general public services, and economic affairs including transport, respectively, Peru’s spending patterns are relatively similar to other unitary OECD countries. For example, while these countries spend slightly less of their subnational budgets on education (21.1%) and health (11.1%), they allocate slightly more to general public services (14.0%) and economic affairs including transport (14.9%).
Note: Subnational expenditure by functional classification (COFOG) is not available for Peru, so data from the Ministry of Economy and Finance, which categorises spending into 22 categories, have been used instead. OECD data for education, health, general public services, and economic affairs (including transport) are provided as an approximate equivalent for comparison purposes.
Source: OECD calculations based on (OECD, 2023[30]). For Peru, (MEF, 2024[32]).
Nevertheless, although strong economic growth led to substantial increases in regional and local budgets–rising by 290% and 347% in nominal terms between 2007 and 2023, from PER 14.2 million to 55.2 million for regional governments and PER 11.1 million to 49.7 million for local governments–the distribution of the public budget across levels of government has remained broadly unchanged. In 2023, the national, regional, and local governments accounted for 58.0%, 22.1%, and 19.9% of the public budget, respectively, very similar to the figures for 2007, when they accounted for 64.5%, 19.9%, and 15.6% (Figure 5.3.) (MEF, 2024[32]). Thus, despite the transfer of responsibilities to subnational governments and the absolute growth in their fiscal resources, the budgetary composition among levels of government has not shifted accordingly.
Source: OECD calculations based on (MEF, 2024[32]).
Subnational tax revenues
Tax revenue represents 2.3% of subnational government revenue, 1.7% of general government tax revenue and 0.4% of GDP, well below the average for unitary OECD countries (33.1%, 18.1% and 4.0% respectively) in 2021 (Figure 5.4).
Note: Data for the OECD shows the unweighted average for unitary countries. PIT is personal income tax. CIT is corporate income tax.
Source: OECD calculations based on (OECD, 2023[30]). For Peru, (MEF, 2024[33]).
The main local tax for subnational governments is property tax, raised at the local level. It accounts for 77.5% of total local tax revenue, or 0.3% of GDP, in 2021, a much higher share than in the OECD average, at 36.4% (IMF, 2024[31]). Beyond this tax, local governments are entitled to raise several minor taxes on vehicles, imports, and property transfers, representing the remaining 22.5% of total local tax revenue (MEF, 2024[34]). However, local governments cannot set the rate of these taxes and must abide by the rates set by the national government as per the Municipal Taxation Law of 2004, modified in 2021 (Official Gazette Legislative Decree No. 776, 2004[35]; Official Gazette Legislative Decree No. 1520, 2021[36]).
Property tax accounted for 7.2% of total local government revenues, largely due to the lack of cadastres in the vast majority of municipalities, only 10% of municipalities in Peru have an operational cadastre. To address this, the Informal Property Formalisation Agency (Organismo de Formalización de la Propiedad Informal, COFOPRI) was created in 1996 to assist with the collection, maintenance, and updating of cadastral information (Official Gazette Legislative Decree No. 803, 1999[37]). The National Cadastre Council (Consejo Nacional de Catastro), with COFOPRI as its Technical Secretariat, oversees these efforts. The long-term goal is to develop an Integrated National System of Cadastral Property Information. As part of this effort, COFOPRI has received financial and technical support from the World Bank through the National Urban Cadastre Project (Proyecto de Catastro Urbano Nacional), which has selected 22 pilot municipalities in the departments of Lambayeque, Lima, and Piura based on criteria such as disaster risk, fiscal importance, historical heritage, and proximity to coastal areas (COFOPRI, 2024[38]). Additionally, several working groups have been established where the Ministry of Economy and Finance and the World Bank provide technical assistance to local governments. In parallel, the Ministry of Economy and Finance has continued to implement the Programme of Incentives for Municipal Management Enhancement (Programa de Incentivos a la Mejora de la Gestión Municipal – PI) since 2009, a results-oriented programme that offers additional grants based on the percentage increase in property tax collection (MEF, 2009[39]). However, at the end of 2023, property tax still represented only 6.0% of total local government revenues (IMF, 2024[31]; MEF, 2024[40]).
On the other hand, regional governments do not have fiscal authority to raise taxes and have extremely limited own-source non-tax revenue, such as user charges and fees. Therefore, regional governments, although they have been allocated a significant series of new responsibilities, have not been granted to this day any fiscal capacity. As a result, the share of revenues directly raised by regional governments (mainly user charges and fees) was down from 12.3% in 2017 to 8.9% in 2020, and to 4.9% in 2021 after the COVID-19 pandemic. A similar downward trend, but slightly higher share, can be seen in the case of local governments, whose share of directly raised revenues (in this case, own-source tax revenue and user charges and fees) decreased from 14.1% in 2017 to 11.0% in 2020, and 10.6% in 2021). This displays the low fiscal autonomy that local and, particularly, regional governments have in Peru (Secretaría de Descentralización, 2024[2]).
Canon and royalties resources accounted for 28% of the total revenue for regional governments in 2023 and 25% of the total revenue for local governments (COMEX, 2023[41]). The regions receiving the highest canon revenues are Cusco (19.0%), Ancash (12.1%), and Ica (10.2%), while regions receiving the least include Lima, Huánuco, and Lambayeque (MEF, 2024[33]). By law, canon resources must remain within the region where the natural resources are extracted but are distributed among various beneficiaries according to criteria established by the Ministry of Economy and Finance, based on population size and unmet basic needs. Specifically, 10% of the total canon is allocated to the local governments of the district(s) where the natural resource is exploited, while 25% is directed to the district and provincial municipalities of the extraction area. An additional 40% goes to the local governments within the region where the resource is extracted. Finally, 25% is allocated to the regional governments of the resource-extracting region, with the obligation that 20% of this amount be transferred to national universities within their jurisdiction (MEF, 2024[42]).
Subnational grants and subsidies
Subnational government finances in Peru are heavily reliant on national government transfers, with grants (including canon revenue) accounting for 91.1% of total subnational revenue on average, equivalent to 8.2% of GDP. For regional governments, grants are nearly the sole source of revenue, making up 98.6% of their total income in 2021. The situation is similar at the local level, where grants constituted 82.0% of total local revenue on average in the same year (IMF, 2024[31]).
A substantial portion of grants are made on a discretionary basis, while equalising transfers are formula-based. Discretionary grants are more flexible insofar as they allow national governments to allocate resources based on specific subnational needs that may emerge over a year or strategic priorities that may not be covered by formula-based transfers. However, discretionary grants are not often granted with sufficient time for subnational governments to plan their annual budgets accordingly, leading to significant changes from the assigned and the modified institutional budgets of subnational governments that trigger last-minute, improvised decisions on current expenses and investment. For example, in 2022 local expenditure varied by 145% between the assigned and modified budgets, and for regional governments, this figure is reduced to 39% (MEF, 2024[32]). The lack of predictability can cause problems when it comes to planning expenses and investments efficiently and in alignment with development plans and objectives.
Beyond the discretionary grants, the Municipal Compensation Fund (Fondo de Compensación Municipal, FONCOMUN) is a significant source of transfers for local governments, accounting for an average of 21.4% of their total revenue in 2021 (MEF, 2024[33]). It is a formula-based equalisation system of unconditional transfers, allowing local governments to allocate these funds to both current and capital expenditures according to their needs, offering them flexibility in addressing local priorities. It is funded by the municipal promotion tax (IPM, 93.95%), the road tax (6.12%), and the tax on recreational craft (0.13%) (MEF, 2024[43]). Therefore, FONCOMUN resources are primarily determined by the collection of the IPM, which is closely tied to the performance of the General Sales Tax (Impuesto General a las Ventas, IGV). The IPM is imposed at a rate of 2% on IGV-taxable transactions, directly influencing the available funds for FONCOMUN distribution (Official Gazette Legislative Decree No. 776, 2004[35]).
In 2021, the Ministry of Economy and Finance transferred PER 7.4 billion to local governments through FONCOMUN (MEF, 2024[44]). For the 1 890 municipalities, the median allocation was PER 1.5 million. The largest transfers were recorded in Lima and in large provincial and district municipalities, such as San Juan de Lurigancho, Coronel Portillo, Piura, and Cajamarca. Notably, 42 municipalities received 25% of the total fund, with 154 municipalities receiving more than PER 10 million, 1 549 receiving less than PER 5 million, and 666 receiving less than PER 1 million. The most common allocation amounts to approximately PER 590 000.
The FONCOMUN distribution process in Peru involves three phases. In the first phase, the total national FONCOMUN fund is divided among the 195 provinces based on poverty indicators, particularly the lack of public services. In the second phase, the amount allocated to each province is distributed among its districts. Of this, 20% is allocated to the provincial municipality, and 80% is distributed among district municipalities, factoring in rurality, territorial extension, and municipal management indicators, such as income generation capacity. In the third phase, adjustments are made to ensure that no district receives less than eight UIT per month from FONCOMUN, or PER 40 000. To achieve this, districts with allocations exceeding 8 UITs contribute proportionally to guarantee this minimum for others. In December 2023, the PCM created a working group consisting of experts from the Viceministry of Economy and the Viceministry of Finance of the MEF and representatives from local governments to review both the allocation formula and the size of FONCOMUN. A key focus of this group is to revise the current three-phase allocation system by incorporating a municipality’s fiscal capacity alongside other territorial factors, such as rurality and land area. Currently, potential fiscal capacity is not considered in the formula. Local governments have also persistently called for a substantial increase to FONCOMUN’s current size of PER 9 billion (District Municipality of Santa Eulalia, 2023[45]; Secretaría de Descentralización, 2024[2]).
The Regional Compensation Fund (Fondo de Compensación Regional, FONCOR) is a formula-based transfer designed to finance or co-finance investments aimed at closing infrastructure and public service gaps, in line with regional development plans under the National System of Multiannual Programming and Investment Management (Sistema Nacional de Programación Multianual y Gestión de Inversiones). Investment needs are calculated based on factors such as population, poverty levels, unmet basic needs, proximity to borders, and efficiency in project execution (MEF, n.d.[46]). While initially restricted to capital investments, a reform in 2020 allowed up to 20% of FONCOR allocations to cover current expenditures and up to 5% for investment feasibility studies (Official Gazette Law No. 31069, 2020[47]). This reform also increased FONCOR’s budget from PER 7 billion to PER 8 billion by adding a contribution of 2% from VAT revenue. The most recent reform, in February 2024, allows regional governments to use FONCOR funds for projects under the “Works for Taxes” programme (see Chapter 5) (Official Gazette Supreme Decree No. 011-2024-EF, 2024[48]).
In 2023, FONCOR represented 42.1% of total revenue for regional governments (MEF, 2024[33]). The regions of Piura, Cajamarca, and La Libertad received 11.3%, 9.7%, and 8.8% of the total FONCOR allocation, respectively, while Cusco, Moquegua, and Tacna received minimal funds. These disparities are largely due to the fact that the latter regions benefit significantly from canon resources.
Subnational government budget oversight
The Ministry of Economy and Finance oversees all government budgets at the regional and local levels. Regional and local governments must develop their budgets in accordance with General Law of Budget National System and Fiscal Responsibility and Transparency Law (Official Gazette Law No. 28411, 2004[49]; Official Gazette Law No. 30099, 2013[50]). The 2013 Fiscal Responsibility and Transparency Law streamlined the framework into two rules. The first rule limits the annual growth in total non-financial public expenditure to the average of revenue growth of the last four years in order to smooth the volatility of subnational governments’ revenue. The second rule restrains the overall fiscal framework by capping the stock of debt that a given subnational government can take to less than their own revenue (measured as an average over the last four years). In 2016, a new legislative decree was enacted that set a new Framework for Subnational Fiscal Responsibility and Transparency (Marco de la Responsabilidad y Transparencia Fiscal Subnacional – MRTF-SN) (Official Gazette Legislative Decree No. 1275, 2016[51]). The MRTF-SN introduced a budget balance rule for subnational government current accounts, with the aim to limit subnational government current expenditure depending on the level of revenue collected. The MRTF-SN established a gradual scale of sanctions for non-compliance with fiscal rules or failing to submit financial information as required by the MEF, easier to be implemented that in the framework of the previous law. However, it also allows exemption from compliance with the fiscal rules when subnational governments have a high credit rating (BBB+ or higher) (OECD/UCLG, 2022[7]).
A unique feature of the Peruvian budget system is that the National Congress approves a consolidated public sector budget that includes both national and subnational government budgets, rather than approving these budgets separately (OECD, 2023[52]). This approach treats all revenue as public sector revenue, without distinguishing between national government revenue, transfers, or subnational governments’ own revenue. Integrating subnational budgets into the budget formulated by the MEF and approved by the National Congress gives the MEF tight control over budget execution across all levels of government, ensuring fiscal stability. This system provides the MEF with a comprehensive view of public sector revenues and expenditures, which, in theory, can allow for more cohesive financial planning. Furthermore, each expenditure item is tied to a specific revenue source, meaning that spending on one item cannot draw from a different source without a formal budgetary amendment. Moreover, each expenditure item is linked to the estimated value of a specific revenue source. In other words, this means that spending on a particular item cannot be undertaken from a different source as set forth in the budget law unless a budgetary amendment is passed. This creates a highly rigid budget, where subnational revenues are strictly allocated to predetermined expenditures. The high level of disaggregation in the budget means that every appropriation, even as low as PER 1 000, must be linked to a specific revenue source, resulting in an extensive budget document with 80 pages, 13 annexes, and approximately 84 000 line items (OECD, 2023[52]). As a result, the MEF exercises strict control over budget formulation and execution, which, while offering potential benefits for fiscal stability, comes at the expense of subnational fiscal autonomy.
Territorial fragmentation
Ensuring that the right administrative capacities for strategic planning and efficient and transparent financial management are in place becomes harder when a country has a high level of territorial fragmentation. At the municipal level, Peru is the most fragmented country in the Latin America and Caribbean region, with an average of nearly 16 000 inhabitants per municipality compared to the weighted average of nearly 35 000 for the Latin American region in 2020 (OECD/UCLG, 2022[7]). Its national extension, much larger than the OECD average, explains why Peru remains above the OECD weighted average of 10 000 in 2022 (OECD, 2023[30]) (Figure 5.5). In terms of population distribution, 9.7% of municipalities (184 in total) account for 70% of Peru’s national population. Over half of all municipalities (56.5%) have fewer than 5 000 inhabitants, with 607 municipalities having fewer than 2 000 residents (INEI, 2022[53]). This also shows the strong disparities in the populations and sizes of municipalities. Provincial municipalities range from 3 270 in Purús to 1.2 million inhabitants in Arequipa (excluding Lima Metropolitana, with 10 million) and from 264 km2 to 120 000 km2, while district municipalities range from 127 inhabitants to 1.2 million inhabitants and from 2 km2 to 35 000 km2.
Note: OECD9 refers to the weighted regional average for nine federal countries, whereas the OECD29 refers to the weighted regional average for 29 unitary countries. OECD38 refers to the weighted average for all OECD countries.
Source: OECD calculations based on (INEI, 2022[53]; OECD, 2023[30]).
Fragmentation is also relatively significant at the regional level, with an average of over 1.3 million inhabitants compared to the weighted average of 2.4 million in all OECD countries in 2022 (Figure 5.6). It is however important to note that four regions concentrate half of the total population (Lima, Piura, La Libertad, and Arequipa, from more populous to less), 10 regions account for nearly 75% of the total population, with the remaining 15 accounting for slightly over 25%. Accordingly, regions in Peru range from 185 000 in Madre de Dios to nearly 11 million inhabitants in Lima and 4 700 km2 in Tumbes to 369 000 km2 in Loreto (excluding the constitutional province of Callao) (INEI, 2013[54]).
Note: OECD9 refers to the weighted regional average for nine federal countries, whereas the OECD29 refers to the weighted regional average for 29 unitary countries.
Source: OECD calculations based on (INEI, 2022[53]; OECD, 2023[30]).
Municipal and, to a lesser extent, regional fragmentation in Peru is significantly hampers the development of strong institutional capacities. With too many small local governments, many struggle to attract and retain the necessary human and administrative capacities. Smaller municipalities in Peru often struggle to hire skilled personnel, limiting their ability to plan, manage, and execute development projects or public services effectively. Additionally, fragmentation can spread financial resources too thinly across numerous small jurisdictions, leaving each with insufficient funds to meet local needs adequately and to hire skilled personnel. This not only reduces the efficiency and transparency of public spending but also hampers the ability of subnational governments to invest in larger, more impactful projects. This fragmentation can exacerbate inequalities in service provision, as larger and better-funded municipalities have more capacity to deliver, while smaller ones fall behind.
While initiatives such as Con Punche Gerentes offer smaller regions and municipalities some relief by covering part of the costs for skilled personnel, they are only a short-term fix, rather than a sustainable solution. In such a fragmented environment, inter-municipal and inter-regional co-operation mechanisms are crucial for sharing the costs and benefits of capacity-building efforts. Equally important is a legislative framework that discourages the creation of new municipalities, which continue to increase despite the Law on the Promotion of Mergers of District Municipalities offering fiscal incentives for districts to merge (Official Gazette Law No. 29021, 2007[55]). Between 2015 and 2020, 33 new district municipalities were established (IDB, 2023[56]), with an additional 16 created in 2021 (INEI, 2022[53]).
Peru has taken significant steps toward enhancing local capacity and decentralising public services. The country has embarked on an ambitious reform of its civil service system, aiming to identify capacity gaps, provide targeted capacity-building, and better align the profiles of civil servants with the specific needs of subnational governments. Additionally, Peru has recently passed a law to implement the Integrated Platform for the Electronic Management of Human Resources, which aims to enable the monitoring and evaluation of public service delivery by subnational authorities (Official Gazette Law No. 31742, 2023[28]). Moreover, 62% of public authorities at all levels of government have developed a Plan for the Development of People to strengthen skills and ensure the professional growth of their staff where needed. Many national institutions also offer training through their deconcentrated offices across all regions of Peru.
In this context, Peru has an opportunity to continue strengthening subnational institutional and fiscal capacity, including allocating responsibilities more clearly across levels of government, advancing in the decentralisation of fiscal capacity and autonomy, ensuring and retaining the right administrative capacities at the subnational level, as well as limiting the creation of new municipalities in a highly fragmented territorial landscape.
While the country has decentralised many tasks and responsibilities to subnational governments, reaching 94.3% of functions prescribed by the Organic Law of Regional Governments transferred to regional governments by 2022 (Secretaría de Descentralización, 2023[1]), this process has not resulted in a clear allocation of responsibilities. Although the national government has expanded the role of regional and local governments, the wording of the laws amending the Organic Laws of Regional and Local Governments lacks clarity in defining the responsibilities and co-ordination between these two levels of government. As mentioned above, in the education sector, regional and local governments are both tasked with very similar tasks, each of them formulating, approving, executing, evaluating, their own educational and cultural policies within their jurisdictions. This ambiguity likely contributes to the fact that education is one of the sectors where municipalities have the lowest budget execution rate, averaging 61% across all municipalities in 2023 (COMEX, 2024[57]). A similar issue arises in the field of environmental protection, where regional governments are expected to “ensure the sustainable management of natural resources, improve environmental quality, and manage climate change.” Apart from being relatively vague, it is hard to understand how this competence is to be shared with local governments, charged with “formulating, approving, implementing, and monitoring local environmental and climate change plans and policies.” Peru would benefit from clarifying these responsibilities by developing competence matrices that clearly delineate the functions and sub-functions for each level of government, ensuring there is no overlap and improving overall governance efficiency.
Clarifying the allocation of competences can not only enhance the delivery of public goods and services but also improve transparency and accountability and prevent a blame game between different levels of government, which often results in the non-provision of essential services. Furthermore, given the tight fiscal constraints under which subnational governments in Peru operate (grants accounted for 91.1% of their revenues in 2021 (IMF, 2024[31])) clearly delineating their specific tasks could help ensure that transfers are better targeted and that there is a better alignment between responsibilities and resources. Ensuring that competences are well-defined to avoid the emergence of underfunded or unfunded mandates is especially crucial for regional governments, which were transferred many responsibilities but were not granted tax-raising authority after the 2005 referendum failed to authorise the merger of departments into regions.
Peru can continue advancing in the decentralisation of resources. The institutional framework governing fiscal matters, such as municipal taxes, has seen little change since its establishment in 1993 (Aragón and Cruzado, 2012[58]; Došek, Quiñón and Elías Pineda, 2022[59]). As a result, the capacity of subnational governments to generate their own revenues and allocate their own budget remains very constrained, particularly for regional governments, as fiscal decentralisation was conditioned on the formal creation of regions–a step that was never completed. Between 2007 and 2023, the national share of the public budget decreased by 6.5 percentage points, while the regional and local shares increased by 2.2 and 4.3 percentage points only, respectively. (MEF, 2024[32]). Thus, despite the transfer of responsibilities to subnational governments and the absolute growth in their fiscal resources, the budgetary composition among levels of government has not shifted accordingly. The increase in subnational fiscal resources is primarily seen as an unplanned or conjunctural decentralisation of fiscal revenues, driven by external factors like the commodity boom or negotiations by governmental actors that directly impacted budgets, rather than through a deliberate, sustained fiscal decentralisation policy (Blanco, Martínez-Vázquez and Porras, 2017[60]; Barco, Chávez and Olivas, 2021[61]). Consequently, Peru’s subnational governments, particularly those that receive canon revenues, are vulnerable to the volatility of the economic cycle, which also affects the ability to plan resource allocation in the medium to long term.
To advance the fiscal decentralisation agenda, five key policy actions should be prioritised. First and foremost, instead of a consolidated budget, Peru should move towards formulating and approving a non-consolidated budget that clearly separates national and subnational budgets, allowing for a clear distinction between national government revenue, transfers, and subnational governments’ own revenue (OECD, 2023[52]). Additionally, Peru should reduce budget rigidity by allowing global budget allocations to be voted on, rather than mandating that each expenditure be tied to a specific revenue source in the law. This would eliminate the need for formal budgetary amendments every time changes are required, which currently adds administrative and regulatory burdens. These reforms are an opportunity to simplify the budget process, enhance transparency, increase budget predictability, and strengthen subnational fiscal autonomy. At the same time, mechanisms such as fiscal rules, the oversight role of the Office of the Comptroller General (Contraloría General de la República), and capacity-building efforts to improve subnational governments’ public budgeting and accounting skills should continue to ensure fiscal stability without relying on a highly complex, rigid, and centrally controlled budget.
Secondly, regional governments should be provided with the mandate and capacity to mobilise their own revenues, in particular the authority to raise tax revenue. By introducing this gradually, regional governments could begin generating and managing their own-source revenue streams, reducing their current near-total dependence on national government grants. This shift would not only empower regional governments financially but also enhance accountability, as they would be directly responsible to their residents for the management of regionally raised tax funds.
Thirdly, the equalisation system of FONCOMUN should be strengthened by incorporating a fiscal capacity component into its formula, enhancing its ability to address fiscal disparities. This would ensure that municipalities with lower capacity to raise their own revenues receive more funding from FONCOMUN. By shifting the formula to focus on capacity and needs, rather than indicators such as rurality and population, the current minimum allocations could be eliminated in the medium term once the revenue-raising capacity of municipalities has been strengthened. Removing these minimums would help level the playing field, as municipalities with higher fiscal capacity would receive less, or no, funding from FONCOMUN. For instance, despite its higher fiscal capacity, Lima still received PER 190 million in 2021, making it the largest recipient of FONCOMUN, accounting for 2.5% of the total fund (MEF, 2024[33]). In addition to modifying the formula, it will be essential to adjust the current three-step distribution rule that determines the allocation for each municipality. Under the existing system, the first two steps can result in two districts with similar populations, needs, rurality, and municipal management receiving different FONCOMUN transfers solely because they are in provinces with varying socio-economic conditions at the aggregate level. Additionally, as long as the canon distribution rules, which mandate that canon revenues remain within the region exploiting the natural resources, remain unchanged, FONCOMUN’s ability to equalise effectively–as FONCOR does–will be limited. To address this, policymakers should consider allocating a percentage of total canon revenues to the new FONCOMUN formula, ensuring a more balanced approach to territorial development.
Fourth, enhancing fiscal capacity–particularly at the local level–will require significant efforts to promote the creation and expansion of cadastres. Apart from hindering private investment, the limited use of cadastres is a key reason behind the low collection of property taxes, which account for only 6.4% of total local government revenue (or 0.3% of GDP) compared to 36.4% and 1.0% on average in OECD countries in 2021. Currently, only 10% of municipalities in Peru have and use cadastres, while the majority rely on property tax assessments based on sworn declarations by property owners, leading to taxes that reflect declared rather than actual property values (OECD, 2024[15]). Most of the municipalities with cadastres are among the 245 that account for 90% of property tax across the country. To address this issue and reduce informality, Peru should prioritise providing fiscal and capacity-building resources to local governments, not only to establish cadastres but also to develop in-house cadastral data management capacities, fostering a culture of effective data management.
Lastly, subnational governments that receive canon funds are particularly vulnerable to revenue volatility, as these funds are directly tied to fluctuations in international commodity prices. Their fiscal structure offers limited capacity to cushion declines in these revenues, leading to pronounced fiscal instability, especially at the local level. To address this, Peru could establish a stabilisation fund that reserves a portion of canon revenues during periods of surplus and accumulates windfall gains from counter-cyclical fiscal policies during economic downturns. This could help smooth out revenue fluctuations, protecting local budgets from commodity price volatility and reducing the risk of macroeconomic instability that can also harm non-extractive sectors.
The potential benefits of decentralisation can materialise only if the necessary human and fiscal capacities are in place. Peru has made steps towards improving its capacities in public financial management over the past five years. In 2023, regional and local governments, on average, executed 8% and 5% more of their current budgets, respectively, compared to 2019, and increased capital investment execution by 21% and 5% (COMEX, 2024[57]). Yet, the execution of subnational budgets remains a challenge, particularly at the local level. In 2023, regional governments, on average, executed 93% of their current budgets and 79% of their capital expenditures. In contrast, municipalities managed to execute only 74% of their current budgets and 64% of their capital expenditures. Within these averages, there is significant variation among municipalities. For example, municipalities in Junín executed 99.6% of their budgets and 67.2% of their investments, while municipalities in Ancash only managed to execute 54% of their budgets and 39.3% of their investments. Bottlenecks are particularly significant in sectors such as education, where local governments executed just 61% of their budgets, and sewerage, where execution rates were 79% at the regional level and 57% at the local level (COMEX, 2024[57]). As a result, there remains a strong demand for capacity-building in several critical areas. 60.5% of municipalities in Peru are seeking additional training in municipal tax management, 58.6% in policy design and evaluation, and 57.7% in developing strategies for financial management of disaster risk, among other things (INEI, 2024[62]).
While the Civil Service Law modified in 2021 seeks to address the disparities in remuneration and duties across Peru’s public employment sector (Official Gazette Law No. 30057, 2013[63]), it may not be sufficient to close the capacity gap. One significant challenge is the high turnover of skilled personnel, a problem highlighted in the National Policy of Public Management Modernisation for 2030 (2022). Although the Civil Service Law aims to reduce salary inequalities within the same job families, which may discourage civil servants from moving to more expensive and dynamic areas such as Lima, it remains unclear how the law will provide positive incentives for workers who receive capacity-building to stay in the regions or municipalities where they are trained.
To address this, Peru should focus on creating additional positive incentives, such as accelerated career advancement, housing or childcare allowances, and other benefits for civil servants in areas with high turnover rates. These measures could help reduce the tendency of trained staff to relocate to more dynamic areas, particularly the capital, where their skills are often lost to the regions that need them most. Moreover, ensuring the full implementation of the Civil Service Law will be crucial. As of 2022, 82 provincial municipalities (42%) and 149 district municipalities (9%)–representing just 12% of all municipalities in Peru–have begun the transition to the new civil service system (SERVIR, 2024[64]). Finally, beyond the Civil Service Law, it will be crucial that Peru continues to implement the 2023-2026 Action Plan for Capacity-Building Management in Local Government to simplify the PDP process by standardising priority areas for training, offering free training programs to address budget constraints, and providing ongoing technical assistance to resource-limited municipalities (SERVIR, 2023[21]).
Finally, a critical area for improvement in Peru, encompassing both institutional and fiscal capacities, is municipal and, to a lesser extent, regional fragmentation. Peru is one of the most fragmented countries at the local level in the Latin America and Caribbean region. Nearly 10% of its municipalities (184 in total) concentrate 70% of Peru’s national population. Over half of all municipalities (56.5%) have fewer than 5 000 inhabitants, with 607 municipalities having fewer than 2 000 residents (INEI, 2022[53]). Moreover, 80% of municipal territorial boundaries are not clearly demarcated, which can lead to territorial disputes and further fragmentation (OECD, 2024[15]).
This high fragmentation stretches human and financial resources thin, making it difficult to establish strong institutional capacities or secure sufficient funding (whether from own-source revenues or transfers) to deliver public services effectively. Without proper co-ordination and resource-pooling mechanisms, further decentralisation to municipalities may erode any economies of scale necessary for efficient service delivery. Similarly, higher fragmentation can lead to greater intra-regional economic inequalities: provinces with a larger number of districts are significantly more prone to wealth disparities, exacerbating inequalities in service provision and, ultimately, in well-being (Secretaría de Descentralización, 2024[2]).
Despite the high level of fragmentation, Peru has continued to create new municipalities contrary to trends across the OECD. Between 2015 and 2021, 49 new district municipalities were established despite the fiscal incentives provided by the Law on the Promotion of Mergers of District Municipalities (INEI, 2022[53]; IDB, 2023[56]; Official Gazette Law No. 29021, 2007[55]). In 2020, a new regulation required the MEF to assess the fiscal sustainability of any proposed district, which has somewhat slowed the pace of new district creation (Official Gazette Law No. 27795, 2002[6]). However, in 2022, Congress declared the establishment of 23 new districts a matter of national interest, making it a legislative priority (Congreso de la República, 2022[65]). Hence, to ensure municipalities are adequately equipped with human and financial resources, the creation of new municipalities should be halted or, at least, strictly limited to specific cases. If a legal restriction on creating new municipalities is ruled out and the FONCOMUN formula retains its minimum allocations, the formula should be revised to prevent the distribution of FONCOMUN funds to newly established municipalities, eliminating the perverse incentive whereby a new municipality would receive additional transfers from the government.
Alternatively, the minimum allocation rule could be removed for municipalities that split, meaning that the original FONCOMUN allocation would be divided between the two resulting entities. This approach would create a disincentive for municipal divisions by reducing or eliminating a key resource from their budgets. Moreover, in addition to creating incentives to prevent further fragmentation, it is equally important to address the existing fragmentation. Mechanisms such as mancomunidades and ad hoc contractual arrangements (see Chapter 3) should be leveraged to facilitate inter-municipal and inter-regional collaboration, enabling the sharing of costs and benefits related to hiring skilled personnel, implementing training programmes, and guaranteeing the effective provision of public services.
Clarify the allocation of competences across levels of government to enhance service delivery, promote transparency and accountability, and prevent the rise of unfunded or underfunded mandates. This can be achieved by developing competence matrices that clearly define the roles and responsibilities of each level of government, while also amending clauses within the Organic Laws of Regional and Local Governments that create confusion or overlap.
Advance fiscal decentralisation to enhance subnational fiscal autonomy and ensure that subnational finances align with the responsibilities transferred from the national government. This should be undertaken through five priority policy actions, to be implemented irrespective of whether regions are formally created or not.
First, this will require moving towards approving a non-consolidated budget–rather than a consolidated one–with global budgetary allocations, thereby providing a clear distinction of national and subnational revenue sources and reducing budget rigidity.
Second, enhancing subnational fiscal autonomy will also require gradually granting regional governments the authority to raise tax revenue, reducing their dependence on national transfers and enhancing accountability at the regional level.
Third, the FONCOMUN formula and distribution rules should be strengthened by incorporating a fiscal capacity component and, in the medium term once the revenue-raising capacity of municipalities has been strengthened, eliminating minimum allocations, so that municipalities with higher fiscal capacity receive less, or no, funds. Policymakers should also consider allocating a percentage of total canon revenues to the new FONCOMUN formula to reinforce FONCOMUN’s ability to equalise effectively.
Fourth, expanding the creation and use of cadastres will be crucial for increasing property tax revenues at the local level and reducing informality. Finally, consideration should be given to the creation of a stabilisation fund to reduce revenue volatility of subnational governments that receive canon revenue.
Promote training and retention of public servants in subnational governments with the greatest capacity gaps by fully implementing the Civil Service Law and offering positive incentives. A comprehensive transition to the new civil service system (currently in its early implementation stages) across all levels of government will help identify areas requiring further capacity building. Similarly, continuing to implement the Action Plan to simplify the process to approve a Plan for the Development of People will be key to promote the identification and access to the trainings that are most needed. Positive incentives, such as accelerated career advancement, housing, or childcare allowances, could encourage trained workers to remain in the regions or municipalities where they received their training.
Disincentivise the creation of new municipalities to prevent further fiscal decentralisation from undermining the economies of scale essential for efficient service delivery. If legal restrictions to this effect are not enacted, the FONCOMUN formula could be revised to prevent the distribution of FONCOMUN funds to newly created municipalities, thereby providing a financial disincentive for municipal partitions. Alternatively, the minimum allocation rule could be eliminated for municipalities that split, ensuring that the original FONCOMUN allocation is divided between the resulting entities. Moreover, it will be equally important to address the existing high levels of fragmentation by clearly demarcating territorial boundaries and by making better use of inter-municipal and inter-regional co-operation mechanisms such as mancomunidades or contractual arrangements to share the costs and benefits of hiring skilled personnel, implement capacity-building programmes, and guaranteeing the effective provision of public services
References
[61] Barco, D., P. Chávez and K. Olivas (2021), Promoviendo mayor eficacia y menor desigualdad a través de la descentralización, Consorcio de Investigación Económica y Social.
[60] Blanco, F., J. Martínez-Vázquez and J. Porras (2017), Perú: hacia la creación de un sistema de descentralización fiscal más eficiente y equitativo, Banco Mundial.
[38] COFOPRI (2024), Cofopri launches National Urban Cadastre Project in the north of the country, https://www.gob.pe/institucion/cofopri/noticias/921958-cofopri-inicia-proyecto-de-catastro-urbano-nacional-en-el-norte-del-pais (accessed on 5 May 2024).
[57] COMEX (2024), Report on the efficiency of public spending, https://www.comexperu.org.pe/upload/articles/reportes/reporte-eficacia-011.pdf (accessed on 15 October 2024).
[41] COMEX (2023), State of subnational public finances in Peru - Special edition, https://www.comexperu.org.pe/upload/articles/reportes/reporte-finanzas-publicas-001.pdf (accessed on 5 May 2024).
[25] CONADIS (2021), Programme for strengthening regional and local governments in the field of disability, https://www.gob.pe/institucion/conadis/campa%C3%B1as/4997-programa-de-fortalecimiento-de-capacidades (accessed on 9 September 2024).
[65] Congreso de la República (2022), Congress approves declaration of national interest for the creation of 23 new districts, https://comunicaciones.congreso.gob.pe/noticias/congreso-aprueba-declarar-de-interes-nacional-la-creacion-de-23-nuevos-distritos-a-nivel-nacional/ (accessed on 14 November 2024).
[45] District Municipality of Santa Eulalia (2023), PCM and mayors to set up a technical working group to evaluate the duplication of FONCOMUN, https://www.gob.pe/institucion/munisantaeulalia/noticias/857503-pcm-y-alcaldes-instalaran-mesa-tecnica-de-trabajo-para-evaluar-duplicar-el-foncomun (accessed on 15 October 2024).
[59] Došek, T., A. Quiñón and M. Elías Pineda (2022), Descentralización por inercia: Un diagnóstico tras dos décadas de la reforma en Perú (2002-2022), Pontificia Universidad Católica del Perú, https://repositorio.pucp.edu.pe/index/handle/123456789/187348 (accessed on 5 May 2024).
[29] El Peruano (2023), Law Nº 31742: A portal to make civil service information transparent in the State is made available, https://elperuano.pe/noticia/212884-ley-no-31742-habilitan-portal-para-transparentar-la-informacion-del-servicio-civil-en-el-estado (accessed on 1 September 2024).
[56] IDB (2023), Outlook of fiscal relations among government levels in Latin America and the Caribbean, IDB, https://publications.iadb.org/en/outlook-fiscal-relations-among-government-levels-latin-america-and-caribbean.
[31] IMF (2024), Government Finance Statistics, https://data.imf.org/?sk=a0867067-d23c-4ebc-ad23-d3b015045405 (accessed on 14 October 2024).
[62] INEI (2024), Indicators of Municipal Management 2023, https://cdn.www.gob.pe/uploads/document/file/6491283/5665613-peru-indicadores-de-gestion-municipal-2023.pdf?v=1720729228 (accessed on 5 May 2024).
[5] INEI (2023), Directorio Nacional de Municipalidades Provinciales, Distritales y de Centros Poblados, https://cdn.www.gob.pe/uploads/document/file/4629046/Directorio%20Nacional%20de%20Municipalidades%20Provinciales%2C%20Distritales%20y%20de%20Centros%20Poblados%202023.pdf?v=1696260903.
[53] INEI (2022), Peru: Population projections - Total by department, province and district, 2018-2022, https://cdn.www.gob.pe/uploads/document/file/3624028/Per%C3%BA%3A%20Proyecciones%20de%20Poblaci%C3%B3n%20Total%20seg%C3%BAn%20Departamento%2C%20Provincia%20y%20Distrito%2C%202018-2022.pdf?v=1701294767 (accessed on 15 October 2024).
[54] INEI (2013), Total surface by type, by department, https://www.inei.gob.pe/media/MenuRecursivo/publicaciones_digitales/Est/Lib1140/cuadros/A01_c04.xls.
[16] MEF (2024), Aplicativo Informático para el Registro Centralizado de Planillas y de Datos de los Recursos Humanos del Sector Público, https://www.mef.gob.pe/es/?option=com_content&language=es-ES&Itemid=100251&lang=es-ES&view=article&id=6068 (accessed on 14 November 2024).
[32] MEF (2024), Budgetary Expenditure (Daily Update), https://apps5.mineco.gob.pe/transparencia/Navegador/default.aspx (accessed on 14 October 2024).
[33] MEF (2024), Budgetary Revenue (Daily Update), https://www.deepl.com/fr/translator#es/en-gb/ingreso%20Presupuestal%20(Actualizaci%C3%B3n%20Diaria)%0A (accessed on 14 October 2024).
[42] MEF (2024), Canon, https://www.mef.gob.pe/es/?option=com_content&language=es-ES&Itemid=100959&lang=es-ES&view=article&id=454 (accessed on 5 May 2024).
[40] MEF (2024), Commitment 2: Improve levels of property tax collection, https://www.mef.gob.pe/contenidos/presu_publ/capacita/2024/23082024_PI_Compromiso_2_Mejorar_niveles_recaudaci%C3%B3n_impuesto_predial.pdf (accessed on 15 October 2024).
[34] MEF (2024), Fiscal capacity of subnational governments and funding and financing for regional development - Multi-level governance and subnational capacity in the framework of the OECD.
[43] MEF (2024), FONCOMUN - Distribution methodology, https://www.mef.gob.pe/es/?option=com_content&language=es-ES&Itemid=100694&view=article&catid=150&id=2398&lang=es-ES (accessed on 15 October 2024).
[44] MEF (2024), Transfers and Financial Allocations to National, Regional and Local Governments, https://www.mef.gob.pe/es/?option=com_content&language=es-ES&Itemid=100302&lang=es-ES&view=article&id=946 (accessed on 15 October 2024).
[18] MEF (2023), Con Punche Gerentes: gobiernos regionales contrataron a 115 funcionarios altamente calificados que mejorarán la gestión e impulsarán la inversión pública, https://www.mef.gob.pe/es/?option=com_content&view=article&id=7927&Itemid=102627 (accessed on 10 July 2024).
[22] MEF (2022), Capacity building for multiannual investment programming, https://www.mef.gob.pe/contenidos/inv_publica/docs/capacitaciones/Capacitacion_2022_03_23.pdf (accessed on 9 September 2024).
[23] MEF (2022), MEF launches programme to strengthen capacities of public servants and the private sector to boost public investment and the economy, https://www.gob.pe/institucion/mef/noticias/656590-mef-inicia-programa-para-fortalecer-capacidades-de-servidores-publicos-y-del-sector-privado-para-impulsar-la-inversion-publica-y-la-economia (accessed on 8 September 2024).
[39] MEF (2009), Municipal Management Improvement Incentive Programme - PI, https://www.mef.gob.pe/es/?option=com_content&language=es-ES&Itemid=101547&lang=es-ES&view=article&id=2221 (accessed on 5 May 2024).
[46] MEF (n.d.), FONCOR, https://www.mef.gob.pe/contenidos/pol_econ/distrib_recursos/foncor/definiciones_foncor.pdf (accessed on 15 October 2024).
[26] MTPE (2021), MTPE’s capacity-building and intervention programme for the Regional Labour and Employment Promotion Managements and Directorates 2021, https://cdn.www.gob.pe/uploads/document/file/1691685/PROGRAMACI%C3%93N%20DE%20FORTALECIMIENTO%20DE%20CAPACIDADES%202021_.pdf (accessed on 9 September 2024).
[15] OECD (2024), OECD interviews conducted with local stakeholders as part of the Peru accession mission (RDPC).
[52] OECD (2023), Public Financial Management in Peru: An OECD Peer Review, OECD Publishing, Paris, https://doi.org/10.1787/d51d43b1-en.
[30] OECD (2023), Subnational governments in OECD countries: Key data (Brochure), OECD Publishing.
[7] OECD/UCLG (2022), World Observatory on Subnational Government Finance and Investment - Country profiles: Peru, https://www.sng-wofi.org/ (accessed on 15 October 2024).
[6] Official Gazette Law No. 27795 (2002), Law on Demarcation and Territorial Organisation, https://www.minam.gob.pe/wp-content/uploads/2017/04/Ley-N%C2%B0-27795.pdf (accessed on 14 October 2024).
[3] Official Gazette Law No. 27867 (2002), Organic Law of Regional Governments, https://diariooficial.elperuano.pe/Normas/obtenerDocumento?idNorma=33 (accessed on 14 October 2024).
[8] Official Gazette Law No. 27972 (2002), Organic Law of Municipal Governments, https://cdn.www.gob.pe/uploads/document/file/5478501/4886882-ley-organica-de-municipalidades.pdf?v=1700857701 (accessed on 14 October 2024).
[49] Official Gazette Law No. 28411 (2004), General Law on the national budget system, https://www.mef.gob.pe/es/normatividad-sp-9867/por-instrumento/leyes/7148-ley-n-28411-2/file (accessed on 15 October 2024).
[55] Official Gazette Law No. 29021 (2007), Law on the Promotion of Mergers of District Municipalities, https://www.leyes.congreso.gob.pe/Documentos/2006_2011/ADLP/Normas_Legales/29021-LEY.pdf (accessed on 5 May 2024).
[63] Official Gazette Law No. 30057 (2013), Civil Service Law.
[50] Official Gazette Law No. 30099 (2013), Law on strengthening fiscal accountability and transparency, https://www.leyes.congreso.gob.pe/documentos/leyes/30099.pdf (accessed on 15 October 2024).
[9] Official Gazette Law No. 30482 (2016), Amendment law that modifies the Law No. 27867, Organic Law of Regional Governments, https://faolex.fao.org/docs/pdf/per159563.pdf (accessed on 14 October 2024).
[12] Official Gazette Law No. 30754 (2018), Framework Law on Climate Change, https://faolex.fao.org/docs/pdf/per177636.pdf (accessed on 14 October 2024).
[47] Official Gazette Law No. 31069 (2020), Law strengthening regional government revenues and investments through the FONCOR, https://www.leyes.congreso.gob.pe/Documentos/2016_2021/ADLP/Normas_Legales/31069-LEY.pdf (accessed on 5 May 2024).
[28] Official Gazette Law No. 31742 (2023), Law that promotes the strengthening, transparency and meritocracy of the civil service through the implementation of the integrated platform for the electronic management of human resources, https://www.investinperu.pe/RepositorioAPS/0/1/JER/NORMAS_LEGALES_2021/LEY-N-31742.pdf (accessed on 1 August 2024).
[10] Official Gazette Law No. 31812 (2023), Law that amends Law 27867, Organic Law of Regional Governments, and Law 27972, Organic Law of Municipal Governments, to ensure the financing of the exercise of the supervisory function of the Regional Councils and Municipal Councils, https://img.lpderecho.pe/wp-content/uploads/2023/07/Ley-31812-LPDerecho.pdf (accessed on 14 October 2024).
[17] Official Gazette Law No. 31912 (2023), Law approving supplementary appropriations for the financing of greater expenses associated with the economic reactivation, the response to the emergency and the imminent danger due to the occurrence of the El Niño Phenomenon for the year 2023, https://cdn.www.gob.pe/uploads/document/file/5340154/4784855-ley_31912.pdf (accessed on 9 September 2024).
[11] Official Gazette Law No. 32096 (2024), Law that modifies Law 27867, Organic Law of Regional Governments, and Law 27972, Organic Law of Municipal Governments, in order to expand functions in fishing matters., https://spijweb.minjus.gob.pe/wp-content/uploads/2024/07/L-32096.pdf (accessed on 14 October 2024).
[19] Official Gazette Legislative Decree No. 1025 (2008), Legislative Decree approving training and performance standards for the public sector, https://faolex.fao.org/docs/pdf/per92034.pdf (accessed on 10 September 2024).
[51] Official Gazette Legislative Decree No. 1275 (2016), Framework for Fiscal Responsibility and Transparency of Regional and Local Governments, https://cf.gob.pe/nosotros/marco-legal/marco-de-la-responsabilidad-y-transparencia-fiscal-de-los-gobiernos-regionales-y-gobiernos-locales-decreto-legislativo-no-1275/ (accessed on 5 May 2024).
[36] Official Gazette Legislative Decree No. 1520 (2021), Legislative Decree amending the Municipal Taxation Law and the Law on the Regulation of Urban and Building Authorisations, https://busquedas.elperuano.pe/dispositivo/NL/2027129-2 (accessed on 5 May 2024).
[14] Official Gazette Legislative Decree No. 1602 (2023), Legislative Decree amending Law No. 30057, Civil Service Law, to strengthen public management through the transition of public entities and to promote the meritocratic access of civil servants to the Civil Service regime, and establishes other provisions, https://busquedas.elperuano.pe/dispositivo/NL/2246611-1 (accessed on 9 September 2024).
[35] Official Gazette Legislative Decree No. 776 (2004), Municipal Taxation Law, https://www2.congreso.gob.pe/sicr/cendocbib/con4_uibd.nsf/9FB09CDC75082094052581560074771E/$FILE/2.Ley_de_Tributaci%C3%B3n_Municipal.pdf (accessed on 5 May 2024).
[37] Official Gazette Legislative Decree No. 803 (1999), Law to promote access to formal property, https://faolex.fao.org/docs/pdf/per69154.pdf (accessed on 5 May 2024).
[48] Official Gazette Supreme Decree No. 011-2024-EF (2024), Supreme Decree that amends the Regulations of Law No. 29230, Law that promotes regional and local public investment with private sector participation, https://cdn.www.gob.pe/uploads/document/file/5847904/5185738-ds011_2024ef.pdf?v=1707745785 (accessed on 5 May 2024).
[13] PCM (2014), Supreme Decree No. 00X-2014-PCM that approves the National Plan for the Strengthening of Capacities for Decentralised Management’., https://www2.congreso.gob.pe/sicr/cendocbib/con4_uibd.nsf/186369EA13D1E05105257DF0005F0D64/$FILE/Propuesta_Plan_Nacional_de_Fortalecimiento_de_Competencias_Gestion-Descentralizada.pdf (accessed on 10 October 2024).
[24] PCM (2014), Open Government capacity building programme for regional and local governments, Fascicle 3, Citizen participation and accountability., https://cdn.www.gob.pe/uploads/document/file/3165595/Programa%20de%20fortalecimiento%20de%20capacidades%20en%20materia%20de%20Gobierno%20Abierto%20dirigido%20a%20gobiernos%20regionales%20y%20locales%20-%20Fasci%CC%81culo%203%20-Participacio%CC%81n%20ciuda (accessed on 8 July 2024).
[58] Pressacco, F. (ed.) (2012), Un balance del actual proceso peruano de descentralización desde lo avanzado en materia fiscal y participación ciudadana., RIL Editores.
[2] Secretaría de Descentralización (2024), Política Nacional Multisectorial de Descentralización, Entregable N.º 1.
[1] Secretaría de Descentralización (2023), Informe Anual de Descentralización 2022.
[4] Secretaría de Descentralización (2022), The importance of a National Multisectoral Decentralisation Policy, https://cdn.www.gob.pe/uploads/document/file/3559598/La%20importancia%20de%20una%20pol%C3%ADtica%20nacional%20multisectorial%20de%20descentralizaci%C3%B3n%20para%20el%20Estado%20Peruano.pdf (accessed on 14 October 2024).
[27] SERVIR (2024), SERVIR announces the start of Regional Classrooms to strengthen the capacities of civil servants throughout Peru, https://www.gob.pe/institucion/servir/noticias/1000431-servir-anuncia-inicio-de-aulas-regionales-para-fortalecer-capacidades-de-servidores-de-todo-el-peru (accessed on 14 October 2024).
[64] SERVIR (2024), Tools for the transition process to the Civil Service Law regime, https://www.gob.pe/institucion/servir/campa%C3%B1as/5332-proceso-de-transito-a-la-ley-del-servicio-civil (accessed on 16 October 2024).
[21] SERVIR (2023), 2023-2026 Action Plan for Capacity-Building Management in Local Government, https://drive.google.com/file/d/1_3u5ERUkHyRiJN5m_KX-H5UTy9STzuzG/view?usp=sharing (accessed on 14 November 2024).
[20] SERVIR (2016), Resolution of the Executive Presidency N.° 141-2016-SERVIR-PE, https://cdn.www.gob.pe/uploads/document/file/1421933/Resolucion%20de%20presidencia%20ejecutiva.pdf?v=1663277664 (accessed on 14 November 2024).
← 1. For further information see: https://www.gob.pe/institucion/servir/campa%C3%B1as/4402-reto-excelencia-tu-posgrado-en-el-extranjero