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

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 amountsof 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.18.44 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