1 The purpose of this policy brief is intended to inform the policy decision makers about the key issues affecting the fiscal decentralisation system and the recommendations that have been agreed on between the central institutions and the local governments.
2.0 THE FISCAL DECENTRALISATION ARCHITECTURE (FDA)
The Fiscal Decentralisation Architecture (FDA) refers to the design of a country’s fiscal operations in a framework of its decentralisation policy.
The FDA design of 2017 therefore was a re-organisation of the country’s LG financing system to a better focus towards improving efficiency and effectiveness of Decentralisation for quality service delivery.
The FDA was mainly to improve equity and adequacy of transfers to Local Governments and institute orderliness and control in the system. It involved the following: a) Reviewing LG expenditure & revenue assignments; IGFT system and institutional arrangements for managing fiscal decentralisation; b) Determining an appropriate share of transfers to LGs from the national budget, commensurate with their mandated functions;
The rationale for FDA
The FDA was based on a key recommendation of the LG financing study, 2012 that stated that there should be a re-design of the Fiscal Decentralisation Architecture to address the following in principle:
a) To have Predictable, equitable and sustainable financing of LGs and the decentralized functions as provided in the 2nd Schedule to the Local Government Act (CAP 243). b) The Institutional roles should be clearer and accountability for each should be easy and followed up. c) Determine the Sharing of nationally generated revenue between different levels of Government. d) Examine the possibility of changing from a grants system to a revenue sharing mechanism as the fiscal transfer system between central and local governments. e) Examine other possible strategies of providing more revenue for LG services say through promotion of public private partnerships (PPP); local economic development (LED); and blended development financing.
3.0 FISCAL DECENTRALISATION CHALLENGES AND
RECOMMENDATIONS
Critical Challenges observed during the design process are grouped in the following six basic components: a) Legal and policy framework.
2 b) Coordination and management. c) Expenditure assignment. d) Revenue assignment – local revenues. e) Intergovernmental fiscal relations. f) Institutional roles.
3.1 Legal and Policy framework
a) Issues The legal regime on fiscal decentralisation is inadequate, dominated by inconsistencies, and lacks provisions to protection LG financing. For example:
a. On creation of new LG or an administrative unit
Article 179(4) – stipulates that any measure for the alteration of boundaries of a district or administrative unit shall be based on the necessity for effective administration and the need to bring services closer to the people, and it may take into account the means of communication, geographical features, density of population, economic viability and wishes of the people concerned.
In practice, however, the creation of a new LG or an administrative unit has
largely been based on the wishes of the people as the basic criteria irrespective of Article 176(2d). Article 176 (2d) stipulates that one of the basic principles for establishing a LG should be such that the new unit created should have a sound financial base with reliable sources of revenue or on economic viability. This has subsequently grossly affected LG financing.
b. Low local revenue collection in the new and mother LGs
The recently created new and the mother districts’ potential local revenues have been taken over by the newly created town councils which cover almost all the growth centres thereby denying the relatively more wealthy bases like markets, business centres and properties that could generate revenues. It should be noted that town councils require new staff establishment and do not share their revenues with the mother districts. This has left the new districts with hardly any reasonable sources of local revenues, thus their inability to run basic services like health, education and water.
Articles 191 and 192 give powers to LGs to collect and appropriate quite a number of fees and taxes as local revenue. But central government has gone ahead to stop LGs from collecting some of the fees and taxes like graduated tax in
3 FY2005/06, bicycle fees, ces in 2010, public vehicle parks in 2017, all without compensation.
Many sections of the legislation relevant for assisting LGs to collect local revenues are inadequate especially for accessing royalty fees from natural resources and that for Local Service Tax whose threshold is quite high and exempts other potential taxpayers.
For these reasons mentioned above and a few others, the local revenue performance in LGs is quite low.
c. Declining Unconditional Grant
Article 193 (2) stipulates that LGs shall be provided with Unconditional Grant as monies to run monies to run decentralised services and shall be calculated in the manner described under Schedule VII which takes care of additional services given to LGs and inflation.
However, in practice, for most of the financial years, LGs have in most of the cases been advised to use the previous financial years’ Indicative Planning Figures in the budgeting process of an ensuing financial year. This has subsequently led to the persistent financial inadequacy at LGs.
d. Contradictions in the basic laws governing financial management
PFMA Act 2015 contradicts LGA CAP 243 for example:
Opening a bank account: Sect 33 (2) of the PFM Act states that a bank account shall not be opened to receive or spend public funds without written authority from the Accountant General. This is contrary to the LGA which allows this duty to the Chief Executive Officer at the LG.
Appropriation of LG funds: LGA Section 77(1) stipulates that LGs shall have the right and obligation to formulate, approve and execute their budgets and plans provided the budgets shall be balanced. Article 191(3) states that no appropriation of funds of a LG shall be made unless it is approved in a budget by its Council. But PFMA Act sections 20 and 22 shifts this power to the Parliament.
Subsequently for FY2019/20, the Parliament operationalised this provision and
appropriated the local revenues for LGs.
A lot of inconveniences and unnecessary costs have been therefore experienced by
LGs while moving to Kampala to open bank accounts.
4 This is a violation of the Article 191(3) of the Constitution and is also contrary to the LGA.
b) Recommendations The FDA design made the following recommendations
a. Amend the legal provisions to ensure adequacy, discretion, coordination of the
Fiscal Decentralisation system (FD) and its protection. b. Review legislation to provide for discretionary LG sharing of a known percentage of national revenues. c. Harmonise the PFM Act and LG Act for effective application to re-align LG funding, budgeting and reporting. d. The Ministry of Local Governments should develop regulations to guide the process for creation of new LGs with a bias on the criteria for economic viability. Their creation without additional resources has negative implications for quality of service delivery.
3.1Expenditure assignments a) Issues a. Several functions are not devolved in practice as per LGA but implemented by CG and financed through CG Votes (subventions) to UGX 1.9trn (FY2017/18), UGX 2.264trn (FY2018/19) and UGX 3.13trn in FY2019/20 . b. Some functions have been centralized e.g. registration of deaths and births c. Some lack legal clarification between CG and LG e.g. secondary education, special needs, technical education, physical planning and trade development services. d. Absence of clearly costed and affordable service delivery norms.
b) Recommendations
a. Specify medium term affordable service delivery standards/norms per
grant/sector.
b. Streamline the mandates of respective stakeholders but in an engagement
between CG and LG. Example, clarifications for secondary education; amendment for the functions the have been centralized - registration of death and birth.
5 c. Review of sector compliance with regard to sector devolution of functions in line with legal provisions (use subventions as point of departure for analysis).
d. Provision of Conditional grants to LGs should be in respect to programs
agreed between the LGs and Sector ministries.
3.2Local Revenue sources
a) Issues a. In spite of some nominal growth of LG own revenue and more significant improvements in selected urban LGs, the real value of LG own revenues has decreased dramatically for over 14 years: from UGX 22,000 in FY 2003/04 to UGX 6,000 FY2016/17. b. Overall local revenues contribute only approximately 5% of total LG revenues c. The assignment of revenues to LGs has over the years witnessed frequent and often drastic changes and interruptions. d. MoFPED Tax Policy does not include role of LG taxes and own revenues.
b) Recommendations a. Government should develop a policy on LG own revenue management within the National Tax Policy to ensure coordination and consistency of local and national tax policy measures and the assignment of meaningful revenue sources to LGs. b. Widen the Revenue bases through: i. Tax sharing/ piggybacking, ii. Select revenue sources out of the National set which could be better collected by LGs and allow the latter to collect them. iii. Grant funding needs to give more prominence to allocations to income generating sectors e.g. agriculture, tourism etc. depending on the uniqueness of the district. iv. Support initiatives like Public Private Partnerships (PPP); Local Economic Development initiative (LED); and roll-out of Local Revenue Databases.
3.3 Intergovernmental Fiscal transfers
a) Issues
6 The operationalization of the legal framework has often deviated from the intended principles of devolution as laid down in the Constitution and this has subsequently bred the following challenges:
a. Limited discretion for LGs to decide on allocations of resources e.g. over 95% are conditional grants ie earmarked. b. Increased number of grants from 10 to 57 in FY2015/16. c. Inequities in resources allocation across LGs e.g. capita transfers of UGX 34,661 to (Wakiso), 151,932 to (Bukwo District) and 260,136 to (Soroti MC), for FY15/16. d. Continuous decline in real value of transfers from the peak UGX 115,757 per- capita in FY 2002/03 to UGX 69,858 in FY2017/18. e. Lack of incentives for LGs to account for resources; and f. There exist significant amounts of off-budget funds and activities being implemented directly by centre at LG level.
b) Recommendations a. Consolidate grants and enhance LG discretion: Gradually increase the Discretionary Development Equalisation Grant (DDEG) and Unconditional non-wage component - Enhance discretionary elements of funding to enable LGs better to respond to local priorities. Remove strings from Unconditional grant and Re-instate equalization transfers: These transfers are intended to preserve local autonomy and enhance inter-jurisdictional equity and discretion. Delink Equalization Grant from DDEG.
b. Enhance Adequacy of LG grants: Over MTEF period restore the value of
LG grants in a manner that in particular increases funding for service delivery (non-wage allocations) and for a phased-in restoration of real per-capita values. c. Procedures for determining the size of fiscal transfers in national budget. It is recommended to strengthen this by endorsement of specific LG MTEF Allocations early in the budget process.
d. Share grants across LGs according to transparent and need based
formulas e. Strengthen LG grants management i. Implement strengthened system for LG performance assessments;
7 ii. Make Explicit and transparent description of LG allocations in budget, including LG own revenues,
iii. Improve LG finance statistics to capture fiscal and in-kind transfers to LGs outside normal IGFT.
iv. Strengthen systems for monitoring of subventions and off budget
allocations for LGs.
v. Strengthen stakeholder adherence to agreed principles through
coordination by the Fiscal Decentralisation Steering Committee.
3.5 Coordination and Management
a) Issues a. Lack of legal framework regarding strengthening of supervision and coordination of the FDA. b. Lack of Coordination and order.
b) Recommendations a. The general management and coordination of the FDA will be undertaken by the recently formed Committees under the Inter-Government Fiscal Transfer Reform ie the Oversight Committee (OC) of Ministers headed by the Minister of Finance; The Fiscal Decentralisation Steering Committee (FD-SC) of Permanent Secretaries chaired by Permanent Secretary/ Secretary to the Treasury; The Fiscal Decentralisation Technical Committee (FD-TC) of technical staff chaired by Director Budget and co-chaired by Director Revenue and Research of LGFC.
b. The Minister of Local Government shall be the lead advocate on local government affairs. The Minister shall lead amendments to the LGA and the regulations.
c. Procedures for negotiation between sector ministries and LGs. It is recommended that negotiations are (i) better prepared and include analysis of subventions (ii) held sufficiently early in the budget phase and (iii) introduction of incentives and sanctions for participation.
d. Procedures for monitoring and reviewing the progress with the implementation of the reforms needs to be developed in a manner that sufficiently monitor both governance and service delivery components of the reforms.
8 3.6 Institutional roles a) Issues a. Weak Institutional Framework – The roles of the stakeholder Ministries, Departments, Agencies and LGs have been overtaken by events; where some are overlapping, lacking and inconsistent.
c) Recommendations a. Review the Institutional roles to enable them fit the changing environment.
9 Conclusion:
In conclusion therefore, the Commission observes and strongly agrees with the above FDA observations and recommendations and notes that:
a) The pursuance of financial adequacy, autonomy, and discretion in decision making
requires Government commitment to decentralisation by devolution.
b) It is important to establish the medium term affordable service delivery
standards/norms per grant/sector so as to have a clearer picture of the amounts required to finance LGs services.
c) It is critical to streamline the mandates of the respective stakeholders but in an
engagement between Central Government and LGs, so that they are adequately catered for in terms of financing and policy.
d) It is important to have a LG local revenue management policy that is linked to
National Tax Policy; and to widen the revenue sources and related initiatives, to have a consistent local revenue management which has ability to expand overtime and subsequently enhance discretion in LG funding.
e) FD should have a framework that guarantees sustainable financing of local
governments. Therefore, strategic measures like restoring the per-capita value, enhanced discretion and equity in grant transfers are necessary.
f) The general management and coordination of Fiscal Decentralisation should be
undertaken by a well coordinated arrangement, for guided implementation of Decentralisation.
g) The negotiation between sector ministries and LGs, on operationalisation of the
conditional grants should be improved to ease their utilisation and lead to quality outcomes.
h) While it is important to give local governments more money to match the
decentralized services, there should be an established monitoring framework to ensure effective performance of local governments to deliver their mandated services to achieve value for money and those provided by the central government institutions.
i) A review of the roles of the stakeholder institutions in the decentralization process is
critical to take care of the emerging and necessary changes so that the functions match the dynamic challenges.
