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MODULE III: URBAN FINANCIAL MANAGEMENT:REVENUE RAISING, BUDGETING AND PARTICIPATION PRESENTED BY DR. J.F.T. AWAITEY, PRINCIPAL BUDGET ANALYST, HEAD OF BUDGET AND RATING DEPT. ACCRA METROPOLITAN ASSEMBLY TEL: 233 20 2112070 EMAIL: firstname.lastname@example.org
WHAT IS FINANCIAL MANAGEMENT? • Managerial activity concerned with planning and controlling of organisation’s financial resources. • Art of mobilizing financial resources and making prudent, judicious, optimum and efficient use of such resources. • “Whole set of activities by which intentions of City Managers and politicians (expressed through various means such as City Strategic Plan) become operational” (The World Bank Institute).
WHAT IS FINANCIAL MANAGEMENT? (cont’d) • It can be said to be muscle and substance of the whole job of management, which is to get things through the co-ordinated efforts of people, purchased goods and services. • System that provides funds for the organisation, ensures the maintenance and control of funds and reports on the use of funds.
WHAT IS FINANCIAL MANAGEMENT? (cont’d) • To sum it up, if we can • Identify clearly what financial resources we need; • Plan and execute well the strategies to obtain them; • Sensibly allocate funds we receive; • Control well their resulting use, and • Justify everything we have done to those entitled to call for an accounting of our stewardship • Then we have been engaging in sound financial management.
FINANCIAL MANAGEMENT IN A DECENTRALISED SYSTEM OF GOVERNANCE • Urban financial management hinges basically on level of decentralization of government machinery of a country. • Financial Management is attributable to the level of financial autonomy granted to local governments in the country
DECENTRALISATION • Sharing of power and responsibility between levels of government or institutions. • Giving local governments financial, legal, institutional and managerial resources to fulfill those powers and responsibilities. • Local governments be made accountable to their constituents and Central Government.
TYPES OF DECENTRALISATION • Political; • Administrative; • Fiscal.
FISCAL DECENTRALISATION • Devolving revenue sources and expenditure functions to lower levels of government. • Expected to boost public sector efficiency, accountability and transparency in service delivery and policy-making.
LEGAL FRAMEWORK FOR FISCAL DECENTRALISATION • 1992 Constitution of the Republic of Ghana – Article 245(b) transfers power to DAs for “levying and collection of taxes, rates, duties and fees”. • Local Government Act of 1993 (Act 462) – Section 94 confers on DAs status of Rating Authority.
LEGAL FRAMEWORK FOR FISCAL DECENTRALISATION • OTHER STATUTES: • Financial Administration Decree of 1979 (SMCD 221). • Financial Administration Regulations of 1979, (L.I.1234). • Financial Memoranda for Local and Urban Councils under the Local Government Act of 1961 (Act 54). • District Assemblies Common Fund Act of 1993 (Act 455) • Local Government (District Tender Boards) (Establishment) Regulations of 1995 (L.I. 1606). • Bye – Laws and resolutions of DAs.
MAIN SOURCES OF REVENUE • Four (4) main groups, namely: • Internally – generated (traditional) sources of revenue • Central Government transfers • Private Sector funding of services • Loans
INTERNALLY – GENERATED REVENUE • Rates • Fees • Licences (Business Operating Permits) • Rents • Trading Services, Investments and Miscellaneous Sources • Lands
CENTRAL GOVERNMENT TRANSFERS • Ceded Revenue; • District Assemblies Common Fund (DACF); • Payment of 100% of salaries of workers of RCCs, DAs and Sub-District Councils; • Road Fund allocations; • Grants in lieu of rates;
CENTRAL GOVERNMENT TRANSFERS (cont’d) • Shares of royalties on land, timber, minerals; • Urban development projects financed with credit/loan funds (external inflows); • Allocations for district projects implemented by sector ministries/departments.
PRIVATE SECTOR FUNDING OF SERVICES • Revenue from this source is manifested in 2 ways: • Provision of infrastructural services, • Provision of management services,
LOANS • Empowerment to borrow under Act 462 (Section 88).
COMMON PROBLEMS IN IDENTIFYING NEW RESOURCES • Local Factors: • Legal; • Institutional; • Low capacity • International factors: • Borrowing on international financial markets is new phenomenon to Sub – Saharan African local governments. • No or low credit ratings
COMMON PROBLEMS IN IDENTIFYING NEW RESOURCES (cont’d) • Mixed Factors: • Low level of both local and foreign investments.
INTER – GOVERNMENTAL SYSTEM OF REVENUE SHARING • Discretionary type; • Mandatory type of revenue sharing.
OWN – RESOURCE OF REVENUES • RATES • Basic Rate; • Property Rate; • Procedures (steps) to be followed in computing rate due: • Estimate the total expenditure of the DA for the fiscal year. • Estimate the Non-Property Rate revenue of the DA for the fiscal year.
OWN – RESOURCE OF REVENUES (cont’d) • Subtract (b) from (a) to obtain expenditure to be met from property rate revenue. • Divide estimated expenditure to be met from property rates by total rateable values of all properties in the Valuation Roll (List) to arrive at a flat (average) or uniform rate impost.
OWN – RESOURCE OF REVENUES (cont’d) • Vary this rate impost according to rating zones/classifications to obtain differential rate imposts. • The rate impost should be varied in such a way that the total of rates payable in respect of each class of property may be equal (i.e. if the Assembly has 100% previous collection performance records) or a bit higher than the figure in (c).
OWN – RESOURCE OF REVENUES (cont’d) • Rate Impost formula could be deduced as follows: ETE – NPRR RI (c)-------------------- TRV • Where, RI (c) is Flat/Average or Uniform Rate Impost in Cedis ETE is Estimated Total Expenditure NPRR is Non-Property Rate Revenue TVR is Total Rateable Value.
OWN – RESOURCE OF REVENUES (cont’d) • Exemptions from payment of property rates Section 99 (1) (a-e) of Act 462 • All premises appropriated exclusively for the purpose of public worship and registered with the DA; • Cemeteries and burial grounds registered with the DA; • Charitable or public educational institutions registered with the DA;
OWN – RESOURCE OF REVENUES (cont’d) • Premises used as public hospitals and clinics; and • Premises owned by diplomatic missions as may be approved by the Minister for Foreign Affairs.
OWN – RESOURCE OF REVENUES (cont’d) • Exemptions from payment of Basic Rate • persons who are in attendance at educational institutions who do not receive any remuneration or income during that period other than an allowance, loan or other grant provided for the purposes of such attendance, and for the purposes of this paragraph “remuneration” does not include any sum received by a person in respect of temporary employment undertaken by him during vacation from an educational institution; and • Persons who are more than seventy (70) years old.
FEES • Two (2) vital documents regulate the levying of fees and rates: • Fee-Fixing Resolution • Rate Imposition Resolution • Guidelines for the charging of Rates, Fees, Licences, etc. issued by MLGRD.
FEES (cont’d) • Guidelines for the charging of Rates, Fees, Licences, etc. issued by MLGRD. • Factors in determining level of fees, licences, etc.: • Cost – recovery • Fairness (Equity) • Deterrence • Competition • Environmental & Economic • Promotional.
FEES (cont’d) • Technical Issues in the Implementation of Guidelines • Difficulty with cost – recovery method. • Difficulty in determining baseline levels of fees, licences, charges. • Which factor choice should be determinant/ dominant? • Late release of Guidelines. • No system of indexation for adjustments in levels in the absence of Guidelines.
LICENSES (BUSINESS OPERATING PERMITS – B.O.P.) • Fee-Fixing Resolution and Guidelines are relevant for licences (BOP) also.
RENT • Computed based on asset registers of DAs and holdings transferred by other departments/agencies
TRADING SERVICES, INVESTMENTS AND MISCELLANEOUS SOURCES • Revenue generated from own trading/ commercial ventures • Dividends from shares • Overpayment recoveries • Sale of scraps by auction
LANDS • Revenue accrues from royalties, concessions, burial fees.
SOME GENERAL PROBLEMS ASSOCIATED WITH REVENUE GENERATION • Lack of adequate and reliable databases • Attitude of non-usage of available data by DAs • Negative attitude of DAs in awareness creation • Lack of tax consciousness and non-payment of rates by the governed/public • Inability to enforce bye-laws as a result of non-existence of tax courts • Corruption
BORROWING AS A SOURCE OF REVENUE • Why should a DA borrow from the Capital Market? • To address critical needs – improving education, social services, roads, sanitation, etc. • The extent of responsibilities transferred to the local government. • Advantages of borrowing • Constraints/Conditionalities on Borrowing
EFFICIENCY IN THE USE OF BUDGET RESOURCES • Begins with approval and allocations of resources (both at DA and national levels). • Problems with Central Government transfers – • Short-payments, • Delays in some transfers • Selective restrictions/constraints on use of certain resources.
EFFICIENCY IN THE USE OF BUDGET RESOURCES (cont’d) • DAs efficient use of budgetary resources depends on the ff: • inflow of resources through trends analysis. • revenue and expenditure levels need to be reviewed regularly. • use of variance analysis reports. • reduction in the unit cost of services. • cost of revenue collection.
CORE FEATURES OF GOOD FINANCIAL MANAGEMENT • Budgeting • Process by which DA compiles statement of activities and programmes it proposes to execute during a budget year and formulate financial policy based on the proposed programmes. • Budgeting is about making financial plans and monitoring activities to see whether they conform to the plan.
CORE FEATURES OF GOOD FINANCIAL MANAGEMENT (cont’d) • Good budgeting entails: • Availability of adequate and reliable data-base(s); • Monitoring of Expenditure; • Computerization of Accounting and Budgeting Systems;
CORE FEATURES OF GOOD FINANCIAL MANAGEMENT (cont’d) • Target setting; • Institutional Strengthening; • Searching for new sources of revenue • Reviewing revenue collection strategies; • Effective Budgetary control system.
ACCOUNTING • Financial Control • Financial regulations: • FAD of 1979 ( SMCD 221) • FAR of 1979 (L.I. 1234) • Financial Memoranda for Urban and Local Councils Of 1961 • Guidelines for Utilisation of DACF, 1994-2001 • Treasury Circulars
ACCOUNTING (cont’d) • Some applications of financial control measures • Accounting for revenue collection within 48 hours. • Opening and use of appropriate books of account. • Preparation and analysis of financial statements as a means of accounting for stewardship (financial accountability).
ACCOUNTING (cont’d) • Factors that determine and influence the need and objectives for local government accounting: • Compliance; • planning and authorization information; • Viability; • Public relations information; • Sources of facts and figures.
ACCOUNTING (cont’d) • Users of financial reports: • MPs/Assembly Members; • Public as Voters and Rate Payers; • Customers or Clients; • Management; • Customers and Suppliers; • Employees; • Donors/Sponsors/Investors/Financial Institutions; • Sound purchasing/procurement and stores management system.
AUDITING • Internal Audit control measures • Value Books Control • Accounting for revenue collected • Billing Procedures • Performance Monitoring • Routine (internal) auditing will include pre-auditing of financial documents to eliminate errors and disclose fraud.
AUDITING (cont’d) • Routine auditing will ensure that: • The organisation’s policies are fulfilled; • Information it requires to manage effectively are reliable, complete and secured;
AUDITING (cont’d) • The DA’s assets are safeguarded; • The internal control system is well designed; • The internal control system is working in practice; • There is value for money. • External (Periodic) Auditing
PARTICIPATORY BUDGETING • Regular interactions between Assembly member and his/her electorate. • To know the DA’s policy direction • To assess the needs of the electorate/ community as stakeholders • To make reasonable demands for the satisfaction of those needs
PARTICIPATORY BUDGETING (cont’d) • Resource mobilization and consensus building in the fixing of fees, rates, etc. and public acceptance of the Budget in principle (consultation with rate-payer groups). • Lessons of Participatory Budgeting: • Puts enormous stress on scarce resources of DA due to competing demands; • Communities with ineffective Assembly members tend to benefit less;
PARTICIPATORY BUDGETING (cont’d) • Improves development as communities associate themselves voluntarily and willingly with projects/programmes; • Where rate payers contribute to the determination of fee levels there is likelihood of they paying willingly and therefore the possibility of improved revenue to the DA.