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URBAN FINANCIAL MANAGEMENT: REVENUE RAISING, BUDGETING AND PARTICIPATION WITH SPECIFIC REFERENCE TANZANIA’S

EXPERIENCE______________________________________

Introduction

Urban councils accorded status of government

Have powers to levy and collect taxes, fees and charges

LGRP addresses problem of under funding Objective of LGRP – to enhance financial

resources and increase the efficiency of their use

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Categories of Sources of Revenue:

Own Source revenues;

Grants

Borrowing

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Own Source Revenues

Taxes e.g. property tax, service levy, rent

Charges Fees for undertaking activities/access to services Need to step up revenue collection effort Need to harmonize and rationalize taxes, fees and

charges

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Borrowing Borrowing benefits present and future generations

Borrowing currently not seen as a source of finance Bond market at national level just emerging Problem of moral hazard leading to Central

Government paying loans of defaulting councils Local Government Loans Board seriously resource

constrained Bond market is a potential source of finance

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Grants

Grants provided to councils since reintroduction of local government system in 1984

80% of recurrent expenditures financed through grants

Currently, councils have no discretion in allocating grants

Act No.6 of 1999 allows for provision of block grants to councils

Block grants provision to be approached on a phased arrangement

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Shortcomings of Current Grants Allocation

Non-transparent and subject to negotiations

Supply focused rather than demand/client driven

No incentive to improve on service delivery

Favours developed/better off councils

No accountability downward

Excess central control over local resources

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Principles to guide design of grant allocations

Provision of adequate resources

Preservation of budget autonomy Enhancement of equity and fairness Transfers to be predictable Simple and transparent formulae Transfer system not to create negative incentives

for revenue mobilization Transfer system to focus on demand for services Transfer system to avoid equal shares Transfers system to avoid sudden changes in

amounts of grants

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Formula-based system being developed with likely factors as follows

Population Number of school age children Infant mortality rate Poverty count Distance from council headquarters

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Problems facing implementation of Formula based System

Financing of holding harmless

Cost of holding harmless Shs.18.44 billion (14.65 billion for Education and Shs.3.79 billion for Health)

Continued disaggregation of grants into PE & OC

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Eligibility for greater Autonomy

All councils were assessed and went through following three steps:

– Council’s accounts not awarded adverse opinion audit report

– Council has substantial own source revenue

– Council operating good financial management systems

Some 11 councils picked for greater financial autonomy

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Division of Resources between Central and Local Government

Should be guided by expenditure responsibilities

Central Government responsible for development of policies, research, professional development, quality control and setting standards

LGAs lead other agents in implementation Steps being taken to rationalize sources of public

revenues

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Planning and Budgeting Local government system and laws call for bottom-

up planning Participatory planning and budgeting emphasized

as part of the reform of local government People at local level are given the chance of

identifying their problems, prioritizing them and looking for solutions to bring about own development

Financial regulations for block grants management require councils to allocate annual budget to each service outlet

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Capacity Building in Financial Management

Councils can only justify their existence by improving on service delivery

This can happen with better management of finances

So ZRTs are providing inhouse training to address weaknesses in financial management

Introduction of Epicor-based system in 32 councils (including 14 urban councils)

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Urban Councils’ Budgets

LGAs budgets are prepared in the context of Central Government process of planning and budgeting

Plans and budgets of LGAs reflect policies pursued by Central Government

Plans and budgets are made under the law and attendant regulations

They should be developed on a bottom-up participatory approach for full ownership

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Process of Budget Formulation

Budget preparation starts with issuance of annual budget guidelines around December

The guidelines recap the sector policies and areas to be given priority in allocation of resources

Currently priority sectors are education, health, water, roads, agriculture and lands

Ministry responsible for local government clarify issues that are relevant to LGAs

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Process of Budget Formulation (Cont…) Important information contained in guidelines includes

levels of funding to enable councils to plan ahead and realistically

Use of GFS codes links Central and Local Government budget preparation and execution

It engenders uniform application and reporting and makes consolidation of budgets and reports of various levels

Primary education sub-sector claims 70% of the grants while 18% of the grants goes to the health sector

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Local Government Budget

Ownership of the plans is entrenched in the people by use of the Opportunities and Obstacles to Development (O and OD)

Technical input to the planning process begins at ward level

So output of the Ward Development Committee begins to assume the required format

This calls for provision of indicative planning levels of funding to wards

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Local Government Budget (Cont…)

It is not always possible to do this with regard to grant funds

Integrated draft council plans and budgets submitted to Regional Secretariats (RS)

Comments and advice of RS incorporated and draft budget submitted to Finance Committee and thence to Full Council for approval

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Budget Execution and Monitoring

Approved budget is part of the law Monthly reports on revenue collection and

expenditure and bank reconciliation statements submitted to Finance Committee

Quarterly reports submitted to Full Council and copies sent to RS for verification and consolidation

Council management responds to questions and queries raised at various levels

Internal audit checks on soundness of the financial and accounting system and on the execution of the budget

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Budget Execution and Monitoring (Cont..) External audit checks on proper accounting for

funds collected and received and the use to which they are put

LAAC discusses auditors’ findings and observations and gives instructions for improvement of financial performance

LAAC’s instructions are binding on the council hence it is an effective monitoring instrument

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Challenges in Budget Execution

Budget not yet accepted as an instrument for

guiding and controlling activities of the council

Poor quality and delayed reporting

Unpredictable flow of funds from own sources

Non adherence to rules and regulations

Inadequate or lack of qualified staff

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Addressing Challenges

These challenges are being addressed under LGRP’s relevant components of Good Governance, Finance and HRD

Good Governance focuses on enhancing financial accountability and transparency, training of Councillors, codes of conduct and reporting upwards and downwards

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Addressing Challenges (Cont...) Financial management focuses on inhouse training,

and use of Epicor-based system in financial management and introduction of formula-based grant allocation system

HRD focuses of restructuring to identify core and non core functions leading to establishing number and quality of staff required

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Need for Capacity Building

Capacity building needs fall under training and provision of equipment

Capacity building also required at Central Government level in order to adequately support and facilitate LGAs in performing fiscal responsibilities

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Conclusion

The country is on right track to fiscal decentralization

There is adequate superstructure for proper budget execution and fiscal reporting by LGAs

Councils need to justify their legitimacy and existence through good governance including improved delivery of services to the people and enhanced accountability and transparency