1 Increasing Local Revenue Nick Devas International Development Department School of Public Policy University of Birmingham August 2005

2 Increasing Local Revenue Examples of good / improving practice in local revenue performance are rare! 1.Attempts to reform property tax 2.Services Tax, Vitoria, Brazil 3.Single Business Permit, Kenya 4.Contracting out revenue collection, Uganda 5.Municipal water supply, Nyeri, Kenya 6.Integrated financial information system, Kenya 7.Johannesburg: reducing arrears

3 Drivers of Improved Practice Central initiatives, e.g. linked to transfers (e.g. Kenya) New powers for LG (e.g.Uganda) Fiscal crises (Ahmedabad, India; Vitoria da Conquista, Brazil) Credit rating (Indian cities, Jo’burg) Strong civil leadership (Hyderabad, Vitoria da Conquista)

4 1. Property Tax Reforms Collection-led strategy, including enforcement (Indonesia 1980s; Ahmedabad 1990s) But updating registers & revaluation also important Mass appraisal systems: simple indicators Self-assessment in Hyderabad (India): –as a means of updating old valuation roll –owners/occupiers assisted by active residents assocs –sample verification –increased coverage –doubled revenue over 3 years

5 2. Reforming Services Tax (ISS) Vitoria da Conquista, Brazil Response by new Mayor to city’s fiscal crisis Instead of awaiting tax declarations by businesses, estimates of turnover prepared by tax dept. for 100 types of business Payment of ISS, based on these estimates, required in advance rather than in arrears Appeals can be made by presenting receipts Changed incentive structure for inspectors: based on fines actually paid Revenue increased by 64% in 2 years

6 3. Single Business Permit, Kenya SBP replaced business licences in 1999 Contribute 15-20% of local own revenues Separated out regulatory role: no pre- requisites for issuing SBP One SBP per business premises Elimination of CG business licences Standard tariff structure based on type and size of business Greater equity, more progressive tariffs, greater revenue potential

7 3. Single Business Permit, Kenya (cont.) LGs select one of the (pre-approved) tariff sets, to generate sufficient revenues LGs compile comprehensive business register > indication of revenue potential One stop shop for issuing SBPs Business classification by self-assessment Billing and receipting tied into IFMS Greatly reduced compliance costs for business Increased revenue for LGs Some problems (eg choosing too high tariff set) Increased transparency & accountability

8 4. Contracting Out Revenue Collection, Uganda LG Act 1997 allowed contracting out Mainly for markets, bus/taxi parks Competitive tenders Contracts include operation & maintenance Substantially increased revenue for LGs and no collection / operating costs Problems: –tender procedures not always followed –contractors disappearing with the money (so monthly payment required up front)

9 5. Improved Revenue Collection, Nyeri Water Supply, Kenya Shift from municipal water dept to water company owned by municipality Management autonomy Effective management, improved performance Revenue collection up from 80% to 95% Effective enforcement action, including against government institutions Shift from being subsidised to making surplus Expanding network to unserved areas

10 6. Integrated Financial Information System, Kenya Computer-based systems being installed in LGs in Kenya Relatively simple Integrates tax registers, assessments, billing, receipting, accounting, reporting, as well as budgeting & expenditure management Increased transparency & accountability Automatic checks Speedy & accurate monitoring & reporting Reduced scope for corruption

11 7. Jo’burg: Reducing Arrears Addressing a culture of non-payment Water & electricity charges, property tax Precipitated a fiscal crisis in 1997 Taking more effective enforcement action (disconnections, court action, seizure of property) But not against poorest (‘Indigence Register’ but problem of identifying poorest) Use of pre-payment meters But illegal connections / re-connections Updating records, repairing meters Now free basic needs supply, cross- subsidised from high volume users