5TH URBAN & CITY MANAGEMENT COURSE FOR

AFRICA

FACE TO FACE AND DISTANCE LEARNING VERSION

OCTOBER 20–24 2003, KAMPALA-UGANDAEthiopia, Ghana, Kenya, Tanzania, Uganda

MODULE III:

URBAN FINANCIAL MANAGEMENT:

Revenue Raising, Budgeting and Participation

By: Francis Lowoth OkoriPrincipal Inspector–Ministry of Local Government, Uganda

1.0. Presentation outline• IntroductionThe Background The Objective of the Module• The legal framework • Revenue Raising Key sources of revenue of Urban Councils The Good practices in revenue raisingThe Constraint and Challenges• The Budget Definition and Purpose The Budget Process• Roles and responsibilities/participatory budgeting

2.0. Introduction 2.1. Background• The Urban and City Management Face-Face

and Distance learning course for Africa is meant to equip Municipal Officers, government officials dealing with Urban LGs among the participants with the necessary skills and attributes that are crucial for effective management of urban LGS

2.2. Objectives of Module III• To promote good practice in urban financial

management through identification of revenue raising methods and enhancing skills in participatory budgeting as a means of promoting allocative and operational efficiency in the use of budget resources

3.0. Legal framework• Powers: The LGs have the right and obligation to

formulate, approve and execute their budgets and plans provided the budgets are balanced

• Budgeting for revenue: LGs budgets shall reflect all revenues to be collected or received by the LG, and how to appropriate yearly .

• National Priorities: LGs have to accord National Priority Programme Areas (PPAs) preferential budget outlays.

• Financial autonomy: Urban LGs shall have autonomy over their financial and planning matters in relation to the District Council, but the District plans incorporates of urban

• Powers to levy tax: Urban LGs have powers to levy, charge and collect fees and taxes as a means to raise local revenue

• Appropriation of Funds: No appropriation of funds by a LG shall be made out of funds of Council unless approved in a budget by its Council

4.0. Revenue raisingKey sources of urban revenue

• 4.1. Funds from Central Government Unconditional Grants Conditional Grants Equalisation grants• 4.2. Locally raised revenue by LGs• 4.3. Donor funds

A number of donors provide funds in form of project support to urban LGs. The urban councils will benefit more from basket funding under the FDS

• 4.4. Loans or Borrowings• Urban LGs are allowed to raise loans by way of debentures,

bonds or any method, but there are legal restrictions to this.

4.1. Funds from Central Gov’ta) The current funding• Conditional grant: This is money given to LGs to

finance programmes agreed upon between the Government and the LGs, and is spent on purposes for which it was made in accordance with conditions agreed upon.

• Unconditional grant: This is minimum grant given to LGs to run decentralised services. LGs have independence, to a great extent as to how to budget for this grant, taking into consideration the National Priority Programme Areas.

• Equalisation Grant: This is money paid to LGs for special provisions for the least developed districts. It is based on the degree to which a LGs is lagging behind the national average standard for a particular service.

b) Government Funding under Fiscal Decentralisation Strategy (FDS)

• Under a) above LG discretionary powers have been undermined by significant growth in conditional grants in form of CG transfers. This has been made worse by decrease in local revenue generation. This development has reduced the autonomy of LG and subsequently affected the policy of Decentralisation in Uganda.

• Currently there are 32 conditional grants and over 75% of the transfers to LGs are in form of conditional grants. The management of conditional grants, all with separate guidelines for implementation present huge burdens to LGs

• FDS is a new strategy of government whose aim is to increase LG autonomy and flexibility in implementing national sector policies

b) Gov’t Funding under continued

• All conditional grants will be reduced into two systems, namely: -

a) The Recurrent Transfer System (RTS)- for all the recurrent conditional grants: and

b) the Development Transfer System (DTS), for all Development Conditional grants.

• Currently FDS is being piloted in 4 out of 14 Urban LGs i.e. Kampala City, Jinja MC, Kabale MC and Gulu MC

4.2. Locally raised revenue by LGs

4.2.1.Key sources of LR for Urban LGs in Uganda

Refer to the legal provisions which give LGs powers to raise local revenue freely

a) Graduated tax

b) Property tax

c) Other revenues

a) Graduated tax• This is an annual tax levied by both District and

Urban LGs on: • Every male person of or above the apparent age

of 18 years who on the first day of the FY is residing within the taxing authority

• Female persons of or above the apparent age of 18 years engaged in any gainful employment or bussiness

• Graduated tax is paid on the basis of assessment of one’s annual income

• There are people exempted from payment of tax. Example people intransit with valid visas, Diplomats, Students, Members of armed forces.

b) Property tax• An Urban LG shall impose rates on property that

is within its area of jurisdiction• An Urban Council may enact laws imposing rates

on persons owning, occupying or in possession of land or buildings in its area in conformity with existing laws

• Note• In Uganda, the property tax are more applicable

to Urban LGs than it is to District Local governments

• On the other hand District LGs derive up to 51% of their revenues from Graduated tax in 1978 it was 78%.

c) Other taxes of Urban Councils• Licences and Permits in respect of services

rendered or regulatory power exercised by the urban LG

• Rents: From lease of property owned by the Urban Authority

• Fees and Fines: Charged on services or imposed by courts administered by urban LG

• Parking Fees: Imposed on parked of vehicles within the Urban LG boudaries

• Advertisement fees• User charges • Other revenue that may have approval of the

Minister responsible for LGs

4.2.2. Status of revenue raising in Ugandaa) The performance of revenue has been poor,

making the absolute amounts for revenue generated for service delivery generally inadequate

• Under exploitation of collectable revenue has led to under collection of budgeted revenues. under collection of 51% was realised in 2000/01 in LGs

• Over dependence on Central Government transfers has made LGs to relax in collection of Local Revenue ( in 2000/2001) FY local revenue contributed only 16% of all revenue of LGs)

• Overall, Urban LGs have experienced less declines in revenue raising than rural LGs, the major explanation is the diversity of their revenue base compared with rural who rely on G. Tax

4.4.3 Good practices in revenue raising a) Tax Administration:

• Annual Revision of imputation values: It is a good practice to review imputation (IVs) values annually if lawful

• Periodic reviews of tendered sources of revenue: It is good practice to review tendered sources of revenue. This can be done by the LG taking over some rented sources when you want to cross check prices against the rented amounts

• Use of reliable and updatable registers: A card can be used to manage the record of each taxpayer as opposed to a tax register book. You don’t have to write new registers every year.

• Privatising Collection: The collection of local revenue is contracted to private firms using competitive bidding. This removes the collection of tax from management. It is also good practise bond the renters or private firms contracted to bank guarantee in case of default

b) Tax Governance• Though the macro policy & legal environment surrounding

local revenue is outside LG control, the law still allows LGs to set tax rates and make Bye Laws or Ordinances so long as it doesn’t conflict with existing laws.

• Policy for LR improvement: A policy can be set by council in form of a strategy or guiding principal to facilitate LR collection and management

• Deregulation of trading licensing procedures: This involves regulative objectives of trade licensing from revenue mobilising objectives

• Task Forces or revenue units: Special teams or units are formed to spearhead revenue mobilisation and collection, like the planning unit spearheads the planning process.

• Capacity building: This is done for both tax payers and administrators, including policy makers

c) Tax management and incentive system• Monitoring and Mentoring LGs: LGs have the obligation

and mandate to monitor and mentor LG during enumeration, Assessment and collection of taxes

• Linkage of tax payment to service delivery: Using revenue collected to improve the services of the source e.g. Use market dues for improving market facilities like toilets in markets, fences, access roads etc…

• Running Tax Education Programmes on media: LGs can organise tax education programmes, or media messages to help create awareness and boost tax generation

• Bulletin: This is for the elite class and fits best in urban LGs• Incentive System: Many LGs award incentives to tax

payers, others reward tax collectors, while others reward the collecting authority like the division or Parish or Cell

4.2.3. Constraints and Challengesa) Policy, legal and institutional challenges

• Institutional constraints: Such as negative attitudes to paying taxes, leaders not paying

• Insecurity and National hazards: In most African countries there is normally some form of conflict like wars and also hazards like bad whether

• Poverty Constraints: The large size of informal sector in the urban area are obstacles to innovative practices

• Poor working relations: The working relations between political leaders and technical staff undermine the team spirit and divert focus from revenue generation

• Political pronouncements: Some political leaders make political pronouncements which affects tax collection

• Legal constraints: Bad laws; in urban LGs centralising the property rating decree and obsolete property rating laws . Also tagging payment of tax to residence (day population)

b) Management Challenges

• Inadequate capacity to enforce compliance: Most urban councils don’t have adequate law re-enforcement officers, leave alone adequate tax administrators

• Mobility of tax payers to and out of Urban LGs. Rural LGs who charge less surround urban LGs

• Relating tax payment to service provision: This is in case of parking fees and licences from markets, they don’t relate at all

• Central Government defaulting to pay taxes: this is mainly with property tax in urban LGs

• Corruption and Embezzlement: Mainly in form of collusion between collectors and tax payers etc…

5.0. Budgeting

5.1. Definition of a budget• A Budget is a statement of an organisation

programmes expressed in monetary terms• A detailed political programme for mobilisation

and spending of resources that are expected to be available in a financial year or a certain period of time

• A detailed financial plan decided politically and reflecting political priorities

5.2. Purpose of a budgetBudgets are instruments of Management, Planning

and control and serves as:i) Democratic function• Negotiation and consensus • Priority decisions now and in future• Use of available resources equitably and fairlyii) Management information for central

Government• National programmes and standardsiii) An Administrative Management instrument• Work plans• Allocations• Monitoring

6.0. Budget process in LGs6.1. Budget Proposals• The budget proposals originate from the Executive

Committees, which are responsible for initiating policies and activities for approval of councils. Detailed activities and their costs are worked out with the assistance of Technical Heads of Departments. Targets to be achieved for each activity are also spelt out.

6.2. Budget Conference• Based on policy and activity proposals in 3.1 above a

budget conference is held. This is aimed at establishing an overview of the present financial situation in the LG and of all activities that may be considered for funding within the framework of the council budget for the next financial year. It is attended by all stake holders of a LG

• Note: A budget conference is not a council meeting, all stake holders are expected to participate in the proceedings

6.0. Budget process in LGs cont’d• 6.3. Identification and costing of priority Programmes

and Activities• The Budget Desk and the Technical planning committee

design and cost departmental programmes to determine the options which are affordable and which are not. The priorities are then costed

• 6.4. Review of costed priorities• The Executive Committee of the council reviews the costed

priorities of sectors to see whether they are in conformity with councils political priorities and the national priorities addressing National Priority Programme Areas. The review is also meant to minimise duplication of investment by sectors and efforts given to the limited resources

• Any adjustments made by the Executive Committee is then incorporated in the final draft budget.

6.0. Budget process in LGs cont’d• 6.5. Presentation and approval of Budget by council• The Chairperson of a Local Government is responsible for

ensuring that the Local Government Budget is presented to Council not later than the 15th day of June (S 83(4) of the LGAct, 1997 and R.15(1) of the LGFARs, 1998).

• If for one reason or another, a financial year commences before the approval of the estimates, a Council may pass a ‘vote on account’ by resolution, authorising expenditure on established services. However, such expenditure should not exceed 25% of the Council’s actual revenue for the preceding financial year (R.16, LGFARs, 1998).

• The Chairperson of the Council signs the approved estimates on behalf of the Council (Regulation 15(3) to become a legal and binding document of council

• The responsibility of approving budgets rests with council and cannot be delegated to any committee of council

6.0. Budget process in LGs cont’d6.6. Budget implementation and Monitoring• Budget implementation involves execution of activities as per

approved work plan & budget • Budget monitoring involves ensuring that: -• The implementation of the work plan is being followed• Value for money is obtained• Budget revision is strictly adhered to by the relevant organs

of council• Book keeping, Accounting and reporting is followed6.7. Budget Evaluation• The evaluation of the budget is spear headed by the

Executive committee. R.6© Provides that at the end of every, the EC of the council evaluates the performance of council against approved work plans and budget

Stage 1: (Jan-Feb)Executive Committee proposes policies

And activities

Stage 2: (Feb-Mar)Budget conference

Held by councils

Stage 3: (April)Budget desk costIdentified priorities

Stage 4:((May)Executive Committee

Review costedpriorities

Stage 5: (June)Chairperson or designatepresents budget to council

Stage 6: (June)Standing C’ttees

Scrutinises budget& make recommen-dations to council

Stage 7: (June)Council debates and

Approves budget

Stage 8: (June)Chairperson signs theBudget & is published

Stage 9: (Continuous)Implementation and

Monitoring

Stage 10: (Continuous)Budget evaluation done

Quarterly against Approved work plans

Group Work1. Urban LGs continue to experience problems in revenue

raising, particularly because of its unique problems which are not rural based. What are the key Constraints and Challenges in your country with revenue raising and administration. Suggest solutions

2. You are the Executive Committee of Your Council/LG. Identify the activities of the Budget Conference and draw a programme.

3. Budgeting is participatory and involves all stake holders; what are the roles and responsibilities of the following: The Council/Political organ, The Executive Committee, The Political Head/ e.g. Mayor for Uganda, The Chief Executive, The Head of the Finance Department, Central Government and the community

Case Study: Kiru Municipal Council• The executive committee of Kiru Municipal Council sat in

an extra-ordinary meeting. The main purpose of the meeting was the declining revenue in Kiru Municipal Council. The council had done the following with no tangible results:

• a) They had informed Government about their flight, but no response was received

• b) The donors operating in the country were requested for project support in key areas of need, but there was no positive response

• c) The council feels the CE is not helping them or is not bothered a bout council revenue matters because he earns a fat salary. They did not invite for the meeting though he is a legitimate secretary of the Executive Committee of Council

• d) They mayor/Chairperson is not in very good books with council also and wants the executive to please them

Case Study of Kiru MC Continued• The Executive Committee as a committee responsible for

policy initiation and proposing programmes and activities for implementation by council made the following recommendations to Kiru Municipal Council

• a) That council should pass a resolution that local revenue should be collected by a central agency appointed by Central Government.

• b) That because of affirmative action women though in gainful employment should not pay tax.

• c) Since political leaders at LG level don’t earn salary but only allowances, they should be exempted from paying taxes

• d) On privatisation of revenue sources, mainly the rates and markets, the executive proposed that, this should be withdrawn from private renters & reverted to administration so that the staff and councillors can also get something.

Required (From the case study)• You are the Chief Executive of Kiru

Municipal Council. These decisions or recommendations were made in your absence and without your advice

• a) Advice the Council and the Executive on the implication of their recommendations if passed by council

• b) Which are the key issues which are against government policy on revenue raising by LGs in your country