Resource Mobilisation for Implementing Decentralisation and Wealth Creation at Local Level: Uganda s Experience

Transcription

1 The Republic of Uganda Resource Mobilisation for Implementing Decentralisation and Wealth Creation at Local Level: Uganda s Experience A presentation at a Joint Meeting of the All Africa Ministerial Conference on Decentralisation and Local Development (AMCOD) and the Conference on Capacity Building on Leadership on matters of Local Governance and Poverty Reduction in Africa, Yaoundé Cameroon: May 2008 BY Mr. Patrick K. Mutabwire Commissioner, Local Councils Development Ministry of Local Government, Uganda

2 RESOURCE MOBILISATION FOR IMPLEMENTING DECENTRALISATION AND WEALTH CREATION AT LOCAL LEVEL: UGANDA S EXPERIENCE 1.0 Introduction Many countries in Africa have adopted decentralisation 1 as the main vehicle for transforming their societies, although the forms adopted range from a high degree of central control to extensive devolution of power to local governments. 2 This is a fundamental shift from the centralist approaches to local governance which had been used during the colonial rule and many years after attaining independence from the colonizers. This system failed to deliver good local governance and to bring about efficient service delivery. To make real improvement in people s lives, in addition to getting the majority of them out of the poverty in which they are mired, Governments have adopted the decentralized approach to delivering development. The critical question which many Governments are still grappling with is financing of decentralisation Decentralisation in Uganda The main objective of the decentralisation policy in Uganda is to democratize society; bring about good governance; improve service delivery; reduce poverty and bring about sustainable development. Decentralization is envisaged not only as a means to empower the people but also as a framework for implementing other Government policies aimed at improving the quality of life and welfare of the people. Decentralization is also seen as a pathway to good governance and promoting transparency, accountability, integrity and representation in the management of public affairs. It has been used as a vehicle for implementing major Government policies and programmes such as: Universal Primary Education (UPE) which aims at putting every primary school age going child to school; Primary Health Care (PHC) which is designed to provide basic better access to medical services in rural areas and Plan for modernization of Agriculture (PMA) which is designed to transform agriculture from a largely subsistence undertaking to a commercial 1 Decentralisation is taken here to mean the transfer of power from the central government to local administrative units. The transfer may entail significant control from the centre (de-concentration), some degree of local discretion (delegation) or extensive powers over local division making (devolution). 2 United Nations Centre for Regional Development, Decentralisation and Citizen Participation in Africa, Vol. 21, No. 1, Spring

3 one. These programmes are today being implemented successfully by the Local Governments because the latter are composed of democratically elected representatives who are closer to the people and have a clear mandated to initiate and implement local development plans that reflect local priorities which are arrived at through active participation by the local population. The Government of Uganda overall goal is to eradicate poverty and to enable Ugandans enjoy a high standard of living. To that end the Country is pursuing a broad development agenda whose components include macro economic reforms, promotion of increased productivity and exports, public service reforms and decentralization. The national vision and development goals are implemented through the Poverty Eradication Action Plan (PEAP). PEAP is Uganda s national planning framework that guides public action to promote economic growth and eradicate absolute poverty. Over 85% of the population of Uganda which stands at 30 million lives in the countryside. About 80% of the rural population is engaged in subsistence agriculture. Only about 61.5% of Ugandans in rural areas and 68% in large urban areas have access to safe water and sanitation services. Until the Universal Primary Education Programme was started in 1996/97 nearly half of primary school going children were not attending school. To date, 98% of school going children have enrolled in school and absolute poverty has reduced to 31%. Although the Local Government Act provides the legal framework for decentralisation and the functions of each level of government are clear, the implementation has taken a conscious and pragmatic approach, where the functions are transferred from the centre in an orderly manner, as the capacity is created. Fiscal decentralisation has taken a similar approach, with the decentralisation of the recurrent budget coming first, while the decentralisation of the development budget is being implemented gradually to ensure the local governments formulate development plans and create enough capacity to implement them. 1.2 Functions and Responsibilities of Local Governments The local governments have been given responsibility to undertake specific functions and provide services. The rational of empowering the local governments is that the local people know their priorities and they can make best use of resources including funds. Since the 3

4 local people are involved in the formulation and implementation of local programmes, an element of ownership is introduced which is critical in achieving better results. It also leads to reduction of costs since the central government staff do not have to commute between their offices and the local governments. The local governments also do the implementation, supervision and monitoring themselves. In order to perform these functions, the Local Governments Act also provides how the activities will be funded. 2.0 Financing Decentralisation Resources for financing decentralisation are mainly from three major sources, namely: Government development partners and local revenues. 2.1 Central Government Transfers All local governments in Uganda are constitutionally entitled to receive unconditional and conditional grants. In addition some local governments, depending on the level of their service delivery in relation to the national average level of service, are entitled to equalisation grant. The proportion of the three sources of resources in the Local Governments budgte varies. Generally, all these types of grants are operational. An unconditional grant is given to a local government to run decentralised services, while a conditional grant is to enable the local government to finance programmes agreed upon between the central government and the local government. An equalisation grant is given to a local government whose service delivery is below national average standard for particular services. Central Government transfers up to 90% of Local Governments budgets. In general the transfers to local governments as a percentage of the national budget have increased over time from about 16.6% in 1997/98 financial year to about 36% in the financial year 2007/2008 of the national budget. The increase in transfers has effectively enhanced the activity levels of local governments to implement the Poverty Eradication Action Plan (PEAP). However, the growth has been more skewed in favour of conditional grants in form of Poverty Action Fund (PAF). Currently, conditional grants constitute over 85 per cent of total transfers to local governments. Since PAF expenditures are tied to achievement of PEAP goals, the majority of the increase in transfers has been via an increasing number of conditional grants. 4

5 2.1.1 Poverty Action Fund (PAF) Uganda is among the first poor and debt-ridden countries to qualify for the International Monetary Fund and World Bank Highly Indebted Poor Country (HIPC) initiative. This was a result of the fact that the Government of Uganda had developed a good and sound poverty reduction strategy. The Poverty Action Fund (PAF) funds are mainly invested by the Local Governments in the agreed Priority Programme Areas (PPAs) namely; primary education, primary health care, water and environmental sanitation, rural feeder roads, agricultural extension and functional adult literacy. Consequently, the level of investment in the service sector has risen dramatically i.e. from US$ 20 million in 1993 to over US$ 500 million to-date. The massive investment in this area has transformed the service delivery landscape in the country. For instance the number of primary school classrooms has increased tremendously. Primary school enrolment has increased from 2million pupils in 1995 to over 7million pupils to date. Central Government Transfers by Category Central Government Transfers (Billions UGX) GRANTS Unconditional Grant Conditional Grant Equilisation Grant Total transfers /8 1998/9 1999/ /1 2001/2 2002/3 2003/4 FINANCIAL YEARS 2004/5 2005/6 2006/7 2007/8 The table below illustrates the growth in central government transfers since 1997 to date (ie bn.in 1997/8 to 1,048.9bn in 2007/ % increase) 5

6 The increased grants have enabled local governments deliver a wide range of services. However, the high percentage of earmarked funds has reduced the discretionary autonomy of local governments over the use resources in areas where need is most felt. (see figures below). 2.2 Contribution of Development Partners Development partners participate in financing decentralisation through support to local governments development initiatives. The funding enables local governments to access more resources needed for provision of improved services. 2.3 The local finances A strong local revenues base is essential for the sustainability of decentralization programmes. In this regard local revenue forms a core means of building an independent and accountable local governance system. It is also a secure source of funds to compliment service delivery. When the public pay their taxes, they are more inclined to hold politicians to account for their conduct. Councilors on the other hand will be more likely to respond to the needs and priorities of the public if: the public pays directly for their political representation, whom they elect, through local elections, the existing infrastructure owned by a local government is sustained by that local government through local revenues, local governments, through their own revenues, contribute towards their investments and services over time. In Uganda, local revenue mobilization, therefore, remains critical input for sustainable implementation of the decentralization policy. What is evident is that those local governments with strong local revenue collection have greater scope for autonomy, and this in principle should enable them to be more responsive to the needs and priorities of their citizens. The Constitution provides for various sources of local revenue to local governments which vary from area to area-based on economic practices, natural endowments, among other things. 6

7 Gradated Tax alone which traditionally contributed over 80% of Local revenue for rural Local Governments and about 30% for urban LGs was abolished in July 2005 and it critically affected local revenues for local governments. In response Government gave Billion shillings to compensate local governments. A local service tax has been introduced to replace graduated tax. Since 1997, local revenue has been declining, both in absolute and in relative terms. As a result, local governments have become increasingly reliant on central grants. An increasing proportion of central government grants are provided as conditional grants and this reliance on central government imply a declining autonomy of local governments. The law also provides for how the locally generated revenue has to be shared amongst various local governments and administrative units. Revenue sharing is very important since each local government or administrative unit has mandatory functions to undertake. The sharing is indicative of the volume of functions and activities performed at each level of local government or administrative unit. The remission of funds to lower councils is intended to encourage people to pay taxes since the more they collect, the more they get back and the more they can fund their own priority activities. A local government may also collect fees or taxes on behalf of the Central Government as its agent, in which case the local government, subject to the agreement between the two parties, may retain a portion of the funds collected The declining trend in local revenues Whilst central transfers remain the main source of revenues for funding decentralized service delivery, local revenue mobilisation performance remains critical for the sustainable implementation of the decentralisation policy. Unfortunately, local revenues have been declining over the past several years and available data for example shows that whereas the districts local revenues stood at Ushs 86 billion in FY 97/98, this figure declined to Ushs 78 billion in FY 99/2000 and even further to approximately Ushs 34 billion in 200/03. This trend certainly presents a challenge for the development and sustainability of decentralization The decline in local revenue performance has been blamed on political pronouncements against graduated tax and over reliance on central transfers which have hampered local 7

8 governments capacity to generate own revenues. The absolute decrease in revenues is more critical in rural local governments. 3.0 Other issues relating to mobilisation of resources 3.1 Utilisation and Accountability of Resources The local authorities have autonomy in the preparation, approval, control, monitoring and oversight of the implementation of their budgets. The budget of a local government has to reflect all revenues and expenditures. This implies that the budget has to incorporate all revenues including local funds, government grants, donor funds and others. The law requires the Local Governments to run balanced budgets which must be based on the approved three-year development plan of the local government, as well as the national priorities. All local government Councils and administrative units are required by law to keep proper books of accounts and to prepare annual accounts and financial statements for auditing. The public officers are accountable personally for any funds used by them out of the Council s coffers. In addition, the council is accountable to the people who are the beneficiaries of the services. 3.2 Bye laws for revenue generation The Councils have the power to enact their own byelaws and regulations to strengthen financial management and accountability and mobilisation of resources to finance their operation. 3.3 Financing of Responsibilities transferred to Local Governments No financial obligation can be transferred to a local government by Central Government or Agency without providing funds for the discharge of that obligation. 3.4 Borrowing by Local Governments A local government council, with the approval of the Minister responsible for local governments, has the power to borrow or raise a loan provided the amount so raised does not exceed 25% of the locally generated revenue and will not infringe on the statutory requirements of the council to perform statutory obligations. The principle considerations 8

9 are that the local government must have the capacity to repay the loan and the funds have to be put to proper use. 4.0 Issues with increasing Central Government Transfers and falling local revenue It has been observed that increasing grants to local governments increases their ability to deliver services and that falling local revenue on the other hand, undermines local accountability. Generally, the disproportionate increase in ear-marked funds over discretionary revenues curtails the autonomy and discretionary powers of local governments. Increasing Grants to LG increases the ability to deliver services UShs Billion Equalisation Grant Unconditional Grants Conditional Grants Between 1994/5 and 1996/7 block and conditional grants were rolled out to all LGs Large increases in grants since 1997/8 As conditional grants for PRSP priorities, fuelled by HIPC & budget support (Poverty Action Fund) 1997/8 2004/5 But Falling Locally Raised Revenues undermines Local Accountability UShs Billion % LG Revenues 13% LG Revenues Large increase in grants undermines LG incentive to collect National politicians have undermined main revenue, graduated tax, saying it was unfair Property tax legislation only recently improved The Bill on introduction of alternative to graduated tax is in Parliament 1997/8 2002/3 9

10 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Discretionary Revenues Earmarked Conditional Grants 1997/8 2002/3 Autonomy is Reducing From 9 earmarked conditional grants in 1997/8 to 32 by 2003/4 Separate workplans and reports for conditional grants need to be prepared for central government 5.0 Strengthening Resources base for Implementing Decentralisation 5.1 Initiatives to Enhance Local Revenues in Local Governments In recognition of the challenges posed by declining local revenues and the need to widen local revenue base, Government has undertaken a number of initiatives aimed at enhancing local revenue mobilization which include: i) initiatives to improve on revenues from property tax in Urban Authorities and Rural Local Governments (Districts and Sub Counties), ii) effective mobilization involving all levels and putting in place incentives linked to meeting of set targets (awarding bonuses), iii) donor funded programmes which have specific components for supporting local revenue enhancement activities have been undertaken by the ministry of local government, iv) a new legislation, the Local Governments (Rating) Act, 2005, has been enacted and is being popularized and operationalized in order to broaden local revenue sources, v) best practices studies in local taxation have been conducted and studies on how to improve the tax sources have been launched, vi) harmonization and deregulation of business licensing has been undertaken in various local governments on a pilot basis. vii) local service tax and hotel tax have been introduced and it is estimated that these taxes will yield over 80bn when fully implemented. 10

11 5.2 Wealth Creation at local levels One of the objectives of Uganda\s decentralisation is to enhance local economic development in order to increase local incomes and expand local revenue bases. This policy shift in implementation of decentralisation was meant to address the apparent gap in the original design of the decentralisation policy which did not take full account of local economic development. The local governments are being re-oriented to invest in their local economies so as to raise house hold incomes in their localities. Ultimately, the resource base for local governments will be broadened because people will have the ability to pay taxes Actions to directly increase the ability of the poor to increase their incomes In Uganda, some of the actions taken to create wealth in localities are contained in the Plan for Modernisation of Agriculture (PMA). PMA is a rural transformation strategy designed to eradicate income poverty through increasing agricultural productivity and diversifying the sources of income of the rural population in a sustainable manner. The seven priority areas contained in the PMA are: research and technology development; agricultural advisory services; agricultural education; improving access to rural finance; agro-processing and marketing; sustainable natural resources utilisation and management; and, physical infrastructure. The above priority areas are in various stages of implementation. Access to productive assets, such as land, is a major issue with respect to wealth creation at local levels. Access to financial resources is the other outstanding barrier to achievement of increased incomes by the poor. While the economic and financial liberalisation undertaken by Government has increased opportunities for accessing credit, 43 percent of Ugandans still have no access to financial services. In part, this is due to the location of Micro-Finance Institutions in urban areas (mostly serving the interest of trade). Various efforts have been made by Government to initiate programmes that support credit giving to the poor, but progress with these has been very mixed. Regrettably, again, the poorest of the poor cannot access micro-finance services because they are too poor to meet the minimum requirements which invariably include possession of land or other collateral, proof that they are engaged in productive employment, recommendations from local leaders, evidence that they have been saving for sometime, etc. 11

12 5.3 Local Economic Development: the new agenda for local governments As discussed above, Local Economic Development (LED) is also being introduced into the local governments portfolio of investments in a bid to enhance people s incomes and expand the tax base for local governments. A Local Economic Development policy and strategy for local governments is being developed. The overall goal of the LED strategy is to contribute to poverty eradication focusing on: i) Improving local governance for sustainable local economic growth; ii) Employment creation; iii) Increased production and productivity of enterprises; iv) Increasing incomes; and v) Broadening the tax base for local governments to deliver the mandated services. The above will be achieved through elaborating systems and mechanisms for increased involvement of people in the monetary economy by: i) Supporting local governments to create a conducive framework for LED through making the localities attractive for investment; ii) Supporting the private enterprises to become more productive and competitive; iii) Supporting the CSOs to become facilitators and agents for promoting local economic development; and iv) Ensuring productive public private partnerships leading to supportive local economic governance systems. Local governments will be supported to comprehend and implement their new role as drivers and promoters of LED so as to improve their localities. This will be done ensuring that local government planning processes and outputs prioritize local economic development through: i) Supporting local governments to formulate LED strategies. The LGs should also facilitate local economic assessments with clear provisions and strategies for public private partnerships. ii) Revising the planning guidelines to capture LED, based on practical experiences. iii) Supporting local governments to facilitate planning and ensure the participation of all stakeholders including the private sector and enterprises. 12

13 iv) Providing funds to invest in LED related activities by ensuring that the investment menu for funding streams to local governments prioritises investments that promote local economic development. 6.0 Key strategies for deepening the implementation of the Decentralisation Policy The key strategies adopted by the Government of Uganda for deepening the implementation process of the decentralisation policy include; creating an enabling framework for citizens, NGOs, Community Based Organisations (CBOs) and the private sector so that they can perform an oversight role in the way public funds are being spent by Local Governments. The other strategies are: promoting public-private partnerships (PPPs) in service delivery; enhancing the capacity of central and local leaders to internalize their roles and functions; enhancing political, administrative and fiscal accountability, both vertically and downwards; extensive civic education on rights and obligations in local development; developing national minimum standards of service delivery and service performance indicators. 7.0 Conclusion Governments implementing decentralisation have largely provided the bulk of resources to finance decentralisation. This arrangement will continue in the foreseeable future. However, this arrangement exposes local governments to financial shocks when the central governments experience problems in resource generation. A strategic way forward for financing decentralisation is through initiating policies aimed at wealth creation and increasing people s incomes. This will expand the tax base for local governments. The local government leadership has to be re-oriented to this new agenda so that they can put in place initiatives that provide conducive environment and support the development of their local economies. Strong and vibrant local economies will provide a broad revenue base from which local governments can mobilize resources to finance their mandates under a decentralized system of governance. 13