A Note on Fiscal Federalism, Service Delivery and Capacity Building: The Case of Ethiopia

1. A Note on Fiscal Federalism, Service Delivery and Capacity Building: The Case of Ethiopia Berhanu WB,07/05/09

2. The theme of the Paper Describe the major feature of Fiscal Federalism in Ethiopia, The link between Decentralization and public service delivery, Capacity building approach for and under decentralization, and Concluding points as a lesson of experience.

3. Country Context Ethiopia is the second largest (populace) country in Africa with a population of more than 74 Million, The Gross National Product of $ 144 percapita makes the country one of Africa�s poorest countries. an average GDP growth rate of around 11% in the past five years (2003/04- 2007/08), but growing macroeconomic imbalances that include high inflation (particularly in the last year) and low foreign exchange reserves,

4. Country Context Cont�d never systematically colonized and had been exercising a very centralized qusi-feudal monarchy followed by a totalitarian Marxist-Leninist government system until 1993/94, After 1993/94 Federal system of Government with 9 autonomous Regional States and 770 Rural Districts (Weredas) as well as city administrations, Disparity in socio-economic bases across Regions, With an overall umbrella of -ADLI strategy, two period of PRSs (SDPRP- 2002/03-2004/05 , PASDEP- 2005/06-2009/10 )

5. Fiscal Federalism Fiscal decentralization, with the objectives of economic efficiency, political efficiency, macro economic stability, and redistribution requires the following instruments: Allocation of responsibilities to levels of government Allocation of taxes Transfer systems Central/Federal Government controls for overseeing sub-national governments Existence of local government election rules

6. Fiscal Federalism Cont�d Ethiopia�s fiscal federalism has the following special features : Fiscal federalism is accompanied with devolution of power /electoral rules/ to Regional States, districts/urban administrations general purpose untied grant is the dominant transfer system from Federal Government to Regional States and from Regional States to districts and urban centers credible and transparent formula has been developed for transfer of resources

7. Fiscal Federalism Cont�d Transfers are made along with capacity building at sub national levels. This is done across a large number of sub-national governments Large share of expenditure especially for social infrastructure is devolved to local governments up to district level. budgeting and financial management system is deployed at a capacity required before entitlement and transfer of resources Resource allocation and utilization decisions are made by elected constituents and cabinet

8. Fiscal Federalism Cont�d In Ethiopia, the legal and institutional framework for decentralization as well as the principles and the need for fiscal decentralization emanates from Federal and Regional States� Constitutions. The objectives of the respective constitutions include the need to devolve fiscal decision-making power to lower tiers of government; to enable Regional States and Woreda governments/administrations provide standard services; and to narrow the vertical fiscal gap and ensure horizontal equalization.

9. Fiscal Federalism Cont�d Accordingly the following Expenditure responsibilities are assigned to the Federal Government: (Article 51) General functions include: Defense, public security, federal police, foreign affairs, formulating overall economic and social policies, to control and manage the country�s fiscal, monetary and foreign investment policies, commerce The sector specific functions include: building the capacities, Insuring food security, enacting laws for the utilization of natural resources, establishing and administering air, rail, water transport, regulate inter-regional trade, establishing national standard and basic criteria for public health, education, science and technology

10. Fiscal Federalism Cont�d Regional States expenditure responsibilities (Article 52) : General functions include: socio-economic development policies implementation, elaboration of strategies and plans, and administration of police, maintain peace and order The sector specific functions include: regional water resource development and protection policy, human capital development, inter-woreda and intra-regional roads, vocational and technical training, TTI, medium level colleges, hospitals and referral hospitals, and regional health service standard setting

11. Fiscal Federalism Cont�d The different State constitutions delineate the following Expenditure responsibilities to the Weredas /Districts: General functions such as: implement various types of policies and laws issued by their respective Regional Governments, prepare and approve district development plans, programs and budgets, administer and manage of the civil servants in the districts, maintain peace and security using the police and militia in the districts

12. Fiscal Federalism Cont�d Sector Specific functions include: primary schools (1st and 2nd cycles), coordinating primary health care preventive and curative activities (i.e., the functions of health posts and health centres), managing and maintaining rural roads, coordinating agricultural development activities, making access to drinking water supply

13. Fiscal Federalism Cont�d The Federal Government revenue assignment (Article 96): includes tax types that are highly progressive, have redistribute nature, and important for economic stabilization The types of tax include: customs duties, personal income tax of Federal employees and international bodies, income on profit, sales and excise duties of Federal enterprises; income taxes on air, rail and sea transport as well as on national lotteries and other games of chance

14. Fiscal Federalism Cont�d The Sub-National�s tax responsibilities includes (Article 97): taxes that are more local in nature and levied on relatively immobile assets, the type of taxes include: personal income taxes on State and Wereda employees, agricultural income tax, rural land use fees, rental income tax, licenses and services fees, Taxes on income from mining operations, royalties and land rentals; Taxes on profit, sales and excise of enterprises owned by the Regional States.

15. Fiscal Federalism Cont�d Joint Federal-regional revenue arrangements are placed along with assignments of tax responsibilities (Article 98) for taxes such as: Profit, excise and personal income taxes, on enterprises jointly established by the Federal Government and Regional States, Profits of companies and on dividends due to shareholders, and On incomes derived from large scale mining and all petroleum and gas operations as well as royalties on such operation

16. Fiscal Federalism Cont�d The expenditure and revenue assignment and the nature of the tax structure in the country results in a mismatch in aggregate revenue capacity and expenditure (vertical fiscal imbalance) As a result the need for intergovernmental transfer Two types of Federal to State transfer: General-purpose grant , Specific - purpose grant

17. Fiscal Federalism Cont�d General-purpose grant (GPG) A formulaic approach in allocating the transfer has been started in 1994/95, The House of Federation approves it, The determination of the transfer pool is based on the MEFF, Considering its skewed distribution and public finance management, external funded projects are considered in the grant allocation, own revenue is additional to grant provided for Federal- State but not for State-Wereda

18. Fiscal Federalism Cont�d Specific-purpose grant (SPG) The objectives of providing SPG is to fulfil the goals of national priorities and also encourage performance improvement, SPG in the Ethiopian context is provided for expenditure assignments that are under the Federal Government or for implementation of Federal program at sub -national level PSCAP- as building and ensuring minimum capacity of sub-national level is federal mandate, Food Security- It is a national goal, PSNP- is a complementary to ensuring food security LIG � Pilot Capital investments for local level, ULGDP � Capital investment for Urban local governments

19. Fiscal Federalism Cont�d Regional State - Wereda Grant System the objective and principle of Regional transfer is to empower weredas to decide on the use of financial resource, The type of transfer is a general-purpose, The formula is designed by Bureau of Finance and Economic Development and approved by the Regional cabinet and then by Regional Council. The fiscal federalism in Ethiopia shows notable results in : The existence of predictable resource flow to sub-national governments Devolving of financial autonomy for sub-national governments , Financing of pro-poor sectors as a result of local level decision making

20. Fiscal Federalism Cont�d The Fiscal challenges can be summarized: Lack of adequate expenditure for undertaking capital projects at local level, Federal Government Dominance of Inter-governmental Expenditure, Lack of reliable and up-to-date data for the Grant Formula, Weak Revenue Base of Regional States and local governments and lack of incentives to raise revenue for local governments, Inadequate borrowing authority by Regional States, and Inequality of Regional States and growing demand for financial resources by relatively less developed Regional States and nationalities

21. Service Delivery Results and Challenges The decentralized model of service delivery contributed significantly to the improvements in outcomes; Expansion in basic services has especially benefited the poor; Ethiopia drives to reach the MDGs through expanded basic services; However, progress is not always even, disparities persist across gender, income groups, and Regions, and differential performance exists in different sectors

22. Service Delivery Results and Challenges

23. Service Delivery Results and Challenges The following summarizes the Service delivery challenges: access to services, equity in the provision of service quality provision of services citizen solidification in the delivery system participation of the grassroots, the poor, on prioritization and decision making ensuring accountability and responsiveness to service delivery Lack of manpower effectiveness and efficiency of operations of institutions

24. Service Delivery Results and Challenges Service delivery challenges Cont�d: sustainability and implementation capacities of institutions dealing with capacity building Absence of up-to-date systems, problems related to change of attitudes Disparity in the efficiency and implementation of capacity building within institutions and spatial units Disparity in pastoral/boarder areas

25. Capacity Building for Decentralized Service Delivery Noting the constraints of service delivery, the Ethiopian government introduced a national capacity building strategy (FY 2001) The nature of capacity building in Ethiopia includes: Capacity building is linked to macro economic and sector development strategies. Capacity building is coordinated by an umbrella institution (Ministry of Capacity Building). Capacity building follows a comprehensive and an all round integrated approach. Based on the capacity building strategy, the government design 14 programs of which 6 of them latter on constitutes the Public Sector Capacity Building Program (PSCAP)

26. Capacity Building Design

27. Capacity Building for Decentralized Service Delivery Civil Service Reform Sub-program to promote the development of an efficient, effective, transparent, accountable, ethical, and performance-oriented civil service Civil service proclamation revised Business Process Reengineering (BPR) advanced Civil Service Reform Offices established in all Ministries Ethics policy developed and anti-corruption commission established Service delivery policy and complaint handling manual issued

28. Capacity Building for Decentralized Service Delivery Expenditure Management and Control Sub-program to strengthen Ethiopia�s public sector fiduciary framework and to improve the efficiency and effectiveness of public expenditure management Comprehensive legal framework for public sector financial administration established New budget classification system adopted nationwide Accounts backlog cleared and double-entry accounting introduced BIS & BDA accounting systems implemented in All regions except two Integrated Budget and Expenditure Management System (IBEX) introduced

29. Capacity Building for Decentralized Service Delivery District Level Decentralization Sub-program to deepen the devolution of power to the lower tiers of regional government and the grassroots level, thereby strengthening participatory decision-making, good governance, and decentralized service delivery Woreda planning and budgeting procedures and woreda fiscal transfer formula Study drafted. Community participation guidelines developed and implemented Woreda organizational structure and office requirements studied Woreda legal framework adopted Woreda SPM developed and implemented Good governance package developed and started implementing

30. Capacity Building for Decentralized Service Delivery Urban Management Capacity Building sub-program to enhance the capacity of municipalities in the delivery of services that meet basic human needs, reduce poverty and improve the environment and enable urban centers to play a more effective role in social and economic development Good governance advanced in cities and towns through restructuring; necessary rules, regulations and manuals developed to manage cities Jobs created through micro and small enterprise (MSE), deepening capacity for participation Enabling environment created for medium and large enterprises

31. Capacity Building for Decentralized Service Delivery Tax System Reform Sub-program to encourage capital investment and development, to increase tax revenues, and to ensure equity and fairness in the tax system Tax proclamations and regulations adopted and implemented at Federal and Regional levels Revenue potential study being implemented at federal and regional levels Tax Identification Number (TIN) and Value Added Tax (VAT) introduced, with a steady rise in registrants SIGTAS (tax administration) and ASYCUDA++ (customs) information systems implemented Organization restructured to support strong enforcement, taxpayer education, and to leverage information and communication technologies Assessment, collection, audit and VAT operational manuals implemented. Tax officers trained

32. Capacity Building for Decentralized Service Delivery Justice System Reform Sub-program to promote the rule of law as well as the efficient and effective functions of the justice system Court Reform Sub-program to enhance access to justice by strengthening the capacity of judges and court clerks, reforming court administration, and implementing a modern case load management system Information and Communication Technology (ICT) sub-program to harness information and communication technologies for the development of human resources, democratization, service delivery, and good governance

33. Capacity Building for Decentralized Service Delivery In Summary, initial results of public sector reform on service delivery indicates that: The link of capacity building to deepen decentralization to districts has tremendously helped for increased access of services in education, health, agricultural extension, water supply coverage, major success in the efficiency of government operations at 14 federal ministries, in most Regional States and districts, on licensing, court case handling, tax administration, revenue collection, expenditure management etc. The use of IT in service delivery (court, expenditure management, tax and school education) have increased, Systems have been placed for community involvement in planning and prioritization and other affairs, Increase in revenue performance.

34. Capacity Building for Decentralized Service Delivery Considering the approach and scope of capacity building activities in Ethiopia compared to other African countries four points can be sited: An independent Ministry is responsible for coordinating a large number of reform programs at federal, Regional States and local levels. the design and executions of capacity building in Ethiopia follows multiple and large integrated sub-programs. Political economy factors drives the approach. it is implemented under federal setting and decentralized environment. Interest on the transfer of knowhow from countries doing well through twining arrangement and consultancy. Learning by doing on a wider scale approach.

35. Concluding Points from Ethiopia�s Experience Efficient decentralized service delivery requires among other things strong ownership, political commitment and leadership, For successful local level service delivery linking it with capacity building is very important, Local level decision on service delivery requires a sustainable/predictable autonomy in financial resources, planning, and implementation Incentive mechanism has a very important role to play in improving service delivery.

36. .