Diagnosing LG Budgetary Processes and Institutions Sudharshan Canagarajah

Background Role of LG budget and institutions is very important and most neglected area for addressing poverty and growth issues Bank was concerned about central government budget/institutions in 1990s Now it is clear without LG reforms - service delivery, poverty reduction and growth are difficult There is increasing AAA on LG; PERs are discussing them; HIPC AAP looks at this Today many LG projects addressing capacity/service delivery challenges

Background to Uganda LG LG played an important role in Uganda development process for more than 50 years - layers LC1-LC5 LGs received 18% in 1997/8 as transfers from CG; 2003/04 - 39% (approx US$400 million) Transfers account for 87% LG revenue Conditional grants guiding national priorities at LG level 70% in 1997/8 to 80% 2003/04 Today 37 separate conditional grants (earlier 70) Number of districts 45 to 56 in last four years

Uganda PFM/CIFA Sound PFM at CG/LG is important to all stakeholders – taxpayers, MPs, councillors, private sector, beneficiaries, donors and govt. Uganda’s CIFA report was a response to this need - budgetary, accountability and transparency Provides a first step towards a single standard assessment of public financial magt for all levels of govt in Uganda. Common Assessment of fiduciary risks

Fiduciary Risk LGIFA Objective Public expenditure unaccounted for. Funds used not for intended purposes. Expenditures far short of value-for-money LGIFA Objective Carry out an assessment of public financial management systems and practices in Ugandan Local Government, including establishing: Progress made; and Priorities for the future Benchmarked financial management in: Apac, Jinja, Kabale and Tororo Districts, and Masaka Municipality

The Contradiction in Uganda’s Fiscal Decentralisation Process Large increases in resources to local governments enabling large scale delivery of services through many earmarked conditional grants Earmarking of resources has reduced local choice the key rationale for strengthening local accountability and responsiveness of service to local need but Central vs Local Fiduciary Assurance

Integrated Assessment High Level Fiduciary Concerns Realism of the Budget Financial Management Capacity Political & Managerial Environment (not benchmarked) Corruption (not benchmarked) Stages in the budget cycle Linking Policies, Plans and Budgets Raising Revenues, Deploying Revenues and Carrying out Activities Including Procurement Reporting on the Use of Resources and Achievement of Results Holding LGs to Account for their Performance

Overview of Benchmarking Results % Benchmarks met Apac Jinja Kabale Masaka MC Tororo Average Primary Budget Outturns 33 78 56 40 MT Plan & Budget Formulation 46 41 70 54 50 External Accountability & Audit 59 71 53 Financial Management Capacity 64 73 55 62 Budget Execution 74 82 69 Accounting & Reporting 89 81 Average Score 58 65

High Level Fiduciary Concerns Assurances Strong PFM systems enable services to be delivered largely as intended in both strong and weak LGs Risks Unrealistic LG Budgets weak tools for articulating and implementing LG objectives Weak political understanding of decisions made budget cycle means budgets less responsive to local priorities Accountability of LGs to the public remains weak Poor political and managerial relations means that weak local governments remain weak Corruption continues to undermine service provision Inadequate technical support undermines new initiatives

High Level Budget Outturns Key Fiscal Performance Indicators Budget Outturns 2002/3 Mean Best Poorest Total Expenditure as % of Budgeted Expenditure 87% 97% J 67% M Total Revenue as % of Budgeted Revenue 91% 99% 83% Local Revenue Received as % Budgeted LR 76% 88% 68% K Local Revenue Received as % Total Revenue 2.5% 3.3% 2.0% T Average % Department Expenditure Deviation 25% 10% 50% A Average Level of Arrears as % Total Expenditure 7% 1% 13% Currently budgets are unrealistic and weak tools for implementing Local Government Objectives Big differences in the realism across LGs Unreliability biggest at sector level Budget Outturns were Benchmarked, only 40% met

Planning and Budgeting Assurances There are adequate technical planning and budgeting skills to deliver a coherent budget process within LGs Improved policies and guidelines being developed which address many of the key weaknesses Risks Development Plans may remain unrealistic, and inadequately linked to the BFP and budget Budgets may continue to be inadequate tools for implementing local government policies, due to unrealism & the lack of contestability over resources. Plans and budgets may remain weak decision making tools for council, as they may be continued to be presented as a technical not political documents

Raising Revenue & Deploying Resources Assurance Systems enable LGs to deploy resources and undertake activities and deliver services with an increasing degree of financial control Risks Low local revenues will continue to undermine autonomy and local accountability to citizens Procurement processes remain inefficient due to inadequate technical expertise & political interference. Execution is unpredictable for sectors, due to weak cash, commitment control & procurement planning. Internal audit’s involvement in pre-audit undermines its ability to carry out objective audits of LG systems, LCs appear able to alter planned activities during FY

Reporting on Use of Resources Assurance There are regular flows of information on finances and performance during the financial year Risks The emphasis or reporting remains vertical which undermines the importance of budgets & workplans Reports will continue to be presented in technical way inaccessible to the public and politicians Without annual performance report, the tools for reviewing LG performance against plans.are limited Monitoring will remain ad-hoc and poorly focused The use of user committees and subcounties in monitoring service provision remains un-exploited, and thus grassroots accountability will remain weak.

Holding LGs to Account Assurance Risks Vertical accountability systems, such as performance assessments, audits, and the LGAC do provide central government with some fiduciary assurance Risks If LGs do not become more actively transparent institutions, then there is likely to remain little demand for local accountability from local governments Without more structured performance assessments of services, there will remain significant variations in performance, and little incentive to improve If councils remain inactive in reviewing performance, services can’t be locally accountable & responsive If subcounty accounts are un-audited, then the risk of misspending resources at lower levels is increased

Key findings Low local revenues undermine autonomy. Development plans weakly linked to BFP/budget Budget execution is unpredictable for sectors and LGs Emphasis of reporting remains vertical Monitoring remains ad hoc and poorly focused Procurement process remains inefficient Heterogeneity in LG performance