1 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

2 Categories of Sources of Revenue:  Own Source revenues;  Grants  Borrowing

3 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

4 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

5 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

6 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

7 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

8 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

9 Problems facing implementation of Formula based System  Financing of holding harmless  Cost of holding harmless Shs billion (14.65 billion for Education and Shs.3.79 billion for Health)  Continued disaggregation of grants into PE & OC

10 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

11 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

12 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

13 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)

14 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

15 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

16 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

17 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

18 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

19 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

20 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

21 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

22 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

23 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

24 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

25 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