Review of Local Government Financing Study Repor… · · 2016-08-02Review of Local Government Financing ... 9.2 Uganda’s Policy of Decentralisation and its challenges ... There

Republic of Uganda

LOCAL GOVERNMENT FINANCE COMMISSION

Review of Local Government Financing Financing Management and Accountability for Decentralized

Service Delivery

OCTOBER 2012

Review of Local Government Financing in Uganda

Page i of 150 FINAL Draft Report

ACRONYMS AND ABBREVIATIONS

BFP Budget Framework Paper

bn Billions

CAOs Chief Administrative Officers

CG Central Government

CG Central Government

COU Church of Uganda

DDP District Development Plan

DDP District Development Plan

DEC District Executive Committee

DPSF Decentralization Policy Strategic Framework

DTB Development Transfer Budget

EFICON EFICON Consulting Ltd

EFT Electronic Financial Transfer

FDA Fiscal Decentralization Architecture

FDS Fiscal Decentralization Strategy

FINMAP Financial Management and Accountability Program

GoU Government of Uganda

GT Graduated Tax

HC II, III, IV Health Centers at Levels Two Three and Four

HLG Higher Local Government

IGFRs Inter-Governmental Fiscal Relations

IPFs Indicative Planning Figures

JAF Joint Assistance Framework

LC Local Council

LDG Local Development Grant

LED Local Economic Development

LG Local Government

LGA Local Government Act

LGBC Local Government Budget Committee

LGBFP Local Government Budget Framework Paper

LGFC Local Government Finance Commission

LGHT Local Government Hotel Tax

LGMSD Local Government Management and Service Delivery

LGROC Local Government Releases Committee

LLGs Lower Local Governments

LMs Line Ministries

LRR Locally Raised Revenue

LST Local Service Tax

MC Municipal Council

MDAs Ministries Departments and Agencies

mn Millions

MoES Ministry of Education and Sports

MoFPED Ministry of Finance Planning and Economic Development

MoLG Ministry of Local Government

MoLG Ministry of Local Government

MTEF Medium Term Expenditure Framework

NAADS National Agricultural Advisory Services

NBFP National Budget Framework Paper

NDP National Development Plan

NGOs Non-Governmental Organizations

NPA National Planning Authority

O&M Operations and Maintenance

OBT Output Budgeting Tool

OPM Office of the Prime Minister


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OSR Own Source Revenue

PAF Poverty Action Fund

PEAP Poverty Eradication Action Plan

PFAA Public Finance and Accountability Act

PHC Primary Health Care

PRDP Peace Recovery and Development Program

PS/ST Permanent Secretary and Secretary to the Treasury

RTB Recurrent Transfer Budget

Shs Shillings

SSC Sector Standing Committees

STP Straight Through Payment

SWAPs Sector Wide Approaches

SWGs Sector Working Groups

TC Town Council

TPC Technical Planning Committee

UCG Unconditional Grant

UGX Uganda Shillings

UPE Universal Primary Education

USE Universal Secondary Education


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TABLE OF CONTENTS

ACRONYMS AND ABBREVIATIONS ............................................................................................................. i

TABLE OF CONTENTS.................................................................................................................................... iii

EXECUTIVE SUMMARY ........................................................................................................................... a

1 BACKGROUND AND RATIONALE ................................................................................................. 6

1.1 Background .................................................................................................................................... 6

1.2 Rationale for the Review of Local Governments’ Financing ................................................ 6

1.3 Objectives and Scope of the Study........................................................................................... 7

1.4 Organization of the Report .......................................................................................................... 7

2 APPROACH AND METHODOLOGY .............................................................................................. 8

2.1 Introduction .................................................................................................................................... 8

2.2 General Study Approach ............................................................................................................ 8

2.3 Sector Case Studies ...................................................................................................................... 9

2.4 Data Analysis and Validation of Findings and quality assurance ...................................... 10

2.5 Study Limitations .......................................................................................................................... 10

3 REVIEW OF FISCAL DECENTRALIZATION STRATEGY .................................................................. 11

3.1 The Uganda Decentralization Policy ....................................................................................... 11

3.2 Imperatives and features of the Fiscal Decentralisation Strategy ..................................... 12

3.3 Experience in implementing the FDS ....................................................................................... 13

3.4 Conditions affecting the implementation of the FDS........................................................... 17

3.5 The forward for the FDS .............................................................................................................. 19

4 INTER-GOVERNMENTAL FISCAL RELATIONS .............................................................................. 21

4.1 Introduction .................................................................................................................................. 21

4.2 Key Findings Associated With the IGFR ................................................................................... 21

4.3 Proposal on review of grant system ......................................................................................... 40

4.4 Key recommendations ............................................................................................................... 42

5 ANNUAL PLANNING AND BUDGETING CYCLE ......................................................................... 46

5.1 Introduction and background .................................................................................................. 46

5.2 Findings relating to the Local Government Planning and Budgeting process ............... 48

5.3 Central and LG Planning and Budgeting cycle under FDS (2002) .................................... 51

5.4 Review of implementation of the Annual Planning and Budgeting Cycle ..................... 53

5.5 Key recommendations ............................................................................................................... 57

6 RELEASES, REPORTING AND ACCOUNTABILITY MECHANISMS ................................................ 59

6.1 Introduction .................................................................................................................................. 59

6.2 FDS and release, reporting and accountability mechanisms ............................................ 59

6.3 Releases ......................................................................................................................................... 60

6.4 Reporting ....................................................................................................................................... 65

6.5 Accountability mechanisms ...................................................................................................... 67

7 LOCAL REVENUE ENHANCEMENT .............................................................................................. 70

7.1 Background .................................................................................................................................. 70

7.2 Local Revenue Administration in Uganda .............................................................................. 71

7.3 Analysis of Performance of Local Revenue Sources ............................................................ 73

7.4 Findings of the Study related to Local Revenue Performance in LGs ............................... 76


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7.5 Recommendations to enhance the significance of Local Revenues .............................. 81

8 LOCAL SERVICE DELIVERY GAPS ............................................................................................... 87

8.1 Introduction .................................................................................................................................. 87

8.2 Service Delivery architecture .................................................................................................... 87

8.3 Major issues for Service delivery units ...................................................................................... 88

8.4 Gaps in Local Service Delivery Financing ............................................................................... 93

8.5 Proposals for financing the gap ............................................................................................. 101

8.6 Recommendations .................................................................................................................... 101

9 PROPOSED INTER-GOVERNMENTAL FISCAL DECENTRALIZATION ARCHITECTURE ............... 104

9.1 Introduction ................................................................................................................................ 104

9.2 Uganda’s Policy of Decentralisation and its challenges ................................................... 105

9.3 The FDA and Challenges in its implementation................................................................... 107

9.4 Proposals for the revised FDA .................................................................................................. 111

9.5 Implications to policy, legal and institutional framework .................................................. 119

9.6 Proposed expanded functions of the LGFC ....................................................................... 121

10 FISCAL DECENTRALIZATION ARCHITECTURE- IMPLEMENTATION MATRIX ............................. 122

ANNEXES ................................................................................................................................................ a

ANNEX 1: SUMMARY REVIEW OF FDS ................................................................................................. a

ANNEX 2: COMPENDIUM OF LEGAL FRAMEWORK FOR REVIEW ........................................................ a

ANNEX 3: LIST OF PEOPLE MET ............................................................................................................. b

ANNEX 4: LIST OF DOCUMENTS REVIEWED .......................................................................................... j


Page a of 150 FINAL Draft Report

EXECUTIVE SUMMARY

A1: INTRODUCTION

Background

In January 2012, the Local Government Finance Commission (LGFC) commissioned a

study to review the financing of Local Governments in Uganda. The study had three

broad objectives:

i. To conduct a review of the Fiscal Decentralization Strategy (FDS) that has now been

in implementation since 2002;

ii. To make recommendations and re-design Uganda’s Intergovernmental Fiscal

Decentralisation Architecture (FDA)1, and

iii. Propose measures to enhance the significance of local revenues.

This study was carried out through the examinations of 4 key areas; (i) the

intergovernmental fiscal relations which covers the grant system, (ii) the local

government annual planning and budgeting process, (iii) procedures for releasing,

reporting and accounting for grants, and (iv) the potential for improving local

revenues.

Methodology

This review is a result of a highly consultative process that covered thirteen (13) districts;

three (3) of which were hard-to-reach2, two (2) relatively new3. In each district the

review was conducted in urban councils (Town Councils and Municipalities) as well as

sub-counties. In each district the team studied service delivery units consisting of: one

school, one health centre, and one water and road delivery unit. At the national level

consultations included meetings with officials in Ministries, Departments and

Government agencies (MDAs) which included Office of the Prime Minister, Ministries of:

Finance; Local Government; Education; Health; Works; Agriculture and Water; Other

agencies of Government visited included the Uganda Road Fund; National Planning

Authority, the National Information and Communication Authority; National Agricultural

Advisory Services (NAADS) among others. The study findings and recommendations

proposed under the study were validated with the Task Force set up by the Local

Government Finance Commission to supervise the study. Further consultations have

been finalized with the Local Government Associations, Parliament and Development

Partners and a wide range of stakeholders who made their input at a National

Stakeholders’ Workshop in Kampala in August 2012.

A2: REVIEW OF FISCAL DECENTRALIZATION STRATEGY

a) Assessment of the Implementation of the Fiscal Decentralisation Strategy (FDS)

In 2002, Government of Uganda rolled out a series of fiscal reforms to improve harmony

between national and local government budget cycle and strengthen financial

accountability mechanisms and reporting under the FDS. The study deduced that while

bold efforts were made to implement these reforms, the performance was generally

mixed. Major reforms to streamline the grant system were not implemented. Below is an

assessment of the performance of key aspects of FDS over the last 10 years:

Aspects where the performance of FDS was poor

i. While FDS, a key principle was streamlining the grants by reducing them in number

through the introduction of Recurrent Transfer Budget as one recurrent transfer

mechanism with sector grant budget lines and one conditional grant per sector,

1 The FDA is the framework of policies, laws, rules and institutional arrangements governing the fiscal relations under a

decentralization framework

2 Kalangala, Kisoro and Moroto 3 New districts refers to those created after 2005


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RTB was never introduced and conditional and unconditional grants have

continued to flow under different mechanisms with the number of grants

increasing from 21 in 2001/02 to 38 to-date.

ii. Streamlining the grants by reducing their number and levels of conditions was a key

component of FDS, however, over 85% of all financing of LGs is currently under

conditional grants leaving very marginal opportunity for local fiscal autonomy.

iii. FDS called for implementation of the principle of flexibility within the grant system

to increase the amount of funding at the discretion of LGs during budget

formulation. These reforms were most critical to achieving the key objectives of

increased LG autonomy and discretion in allocation decisions. However, the

flexibility principle did not carry on beyond two years into FDS implementation

especially due to reservations by health and education sectors on the

infringement this process was having on their sectoral fiscal performance.

Aspects where the FDS performed well and moderately

i. The harmonization of the Central Government and LG annual planning and budget

cycle was an important undertaking under the FDS implementation. This

integration allowed Government to be more responsive to local needs and

streamlined budgeting in a manner that minimized wastes through an in-built LG

reporting and accountability mechanism. The challenge remains the limited

financial resources to allow LGs to engage communities especially at village and

parish levels comprehensively in the process.

ii. Adoption of a quarterly release system improved predictability of releases to LGs and

improved execution of functions in LGs albeit inadequacies in financing of some

decentralized functions;

iii. There was a robust effort to streamline accountability mechanism through the

Output Budget Tool and Form B. While it is still work in progress, this study noted

improvements overall;

There has been improvement in service delivery as a result of implementing the FDS in

most sectors. Most of the tenets of FDS were indeed well intentioned. It is therefore

recommended that the strategy is further strengthened basing on proposals on main

aspects of the re-designed Fiscal Decentralization Architecture.

A3: THE INTER-GOVERNMENT FISCAL TRANSFER RELATIONS

a) Status Quo of Fiscal relations Between Central and Local Governments

By and large Local Governments continue to be heavily reliant on the Central

Government (CG) for funding. Grants from CG to LGs contribute over 85% of financing

to LG budgets. Accordingly, their magnitude and operations are critical to the ability of

LG to deliver services effectively. There are three main grants to local governments:

i. Conditional grants which constitute more than 90% of all funding;

ii. Unconditional grants which constitute about 7% of all funding and present LGs with

discretion in spending and flexibility to move allocations within and across sectors;

iii. The Equalization grants intended as a subsidy to Districts / Local governments

lagging behind severely in service delivery indicators.

iv. In addition to these, Local governments collect local revenue which is less than 3%

of all financing.

While grants have grown in nominal terms over the past 10 years, most of this growth

has been in wages with no real growth in non-wage recurrent grants. LG grants have

not shared in the growth in the national revenues in the same way as Central

Government. Overall while the national budget has grown from Shs.2.9 Trillion in

2003/04 to 10.1 Trillion in 2012/13 (a growth of over 248%); transfers to LGs have only

grown from Shs.741.5 billion to 1.64 Trillion (a rate of 43.4%). After the suspension of

Graduated Tax (GT) during the 2005/06 Financial Year and later its abolishment in 2008,


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local government revenues plummeted and over the last six years districts have

become much more reliant on the centre for financing- making distant the reality of

real fiscal autonomy – a fundamental basis for decentralization policy.

b) The Need to Review the Grant System to protect financing of Local Governments

In light of the status quo described in (a) above the study recommends ways in which

the grant system can be improved:

i. There is need raise the profile of Local Governments’ financing and decentralized

service delivery at the highest levels of Government i.e. at Cabinet and

Parliament;

ii. There is need for amendment of laws especially the Budget Act and the Public

Finance and Accountability Act with aspects that will require Cabinet /

Parliament interaction on LG service delivery during budget cycle;

iii. There is need to strengthen further the analytical function of LGFC to negotiate,

advise and monitors LG financing and service delivery;

iv. To protect local investments, there is an imperative need to increase funding

(unconditional grants) for supervision and monitoring functions so as to reduce

service failure risk.

The study also proposes rules under the re-designed FDA requiring all financing for LG

functions to be implemented within the grant system in a form that ensures

transparency and equity.

c) International Best Practices on Intergovernmental fiscal relations

To further protect the financing of LGs, the study presents options to consider basing on

international based practices as highlighted below that Uganda can study and

emulate:

i. THAILAND:The constitution mandates that revenue assignment to LGs be at least

20-35% of national total revenue. In 2011, revenues for LGs under this arrangement

stood at Baht 99.8billion (13.3%) of the total revenue having grown by over 330%

between 2001 and 2011. By law the share of revenue for LGs is determined as a

target. Currently the target is to make it 35% of the total government revenue.

ii. KENYA:Articles 202 and 203 of Kenya’s new Constitution (2010)provide for

equitable share of 15% of nationally raised revenue between LGs. In addition to

this, the Central Government provides conditional and equalization grants.

iii. CHINA: China has five levels of government composed of Central Government,

provincial/municipal governments, city governments, County governments and

Prefectures. 75% of VAT goes to Central Government and 25% to other

governments basing on a revenue sharing formulae; 40% of Enterprise Income Tax

(tax paid by railways, postal services by state industrial commercial body,

agriculture bank of chine etc) goes to LGs while 40% of individual tax income, oil

and other resource tax, stamp duty among others goes to LGs with 36% going to

other government branches.

A4: ANNUAL PLANNING AND BUDGETING; RELEASES AND ACCOUNTABILITY MECHANISMS

a) Harmonization of the LG and CG Planning and Budgeting Cycles

The LG annual planning and budgeting cycle has improved tremendously over the last

10 years meeting some of the requirements agreed to in the FDS. LGs feel the cycle is

relatively adequate to support their budget preparation process. However, delays in

issuance ofbudget guidelines and Indicative Planning Figures (IPFs) by Central

Government encumber the proper implementation of cycle limiting the time available

to LGs for consultations during their budget formulation. The study however


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recommends a review to provide for early start and timing of negotiations on

conditional grant guidelines to further improve the process.

b) Reporting

Over the FDS period, the Ministry of Finance Planning and Economic Development

(MoFPED) rolled out the Local Government Output Budgeting Tool (LG OBT) which has

gone a long way in streamlining reporting on expenditures as approved. Further-on,

using Performance Contract (Form B), reporting is more output oriented and has

become timelier. The study notes that sustained training of all department staff is vital in

ensuring success of this reform. The MoFPED is called upon to sustain reformation of

these tools especially the incorporation of sector-specific qualitative reporting needs.

a) Accountability mechanisms

Government has also equally put efforts to improving accountability mechanisms in LGs

with improvements in capacity and more regular audits. However, (i) there are still

significant delays in release (up to 4 weeks sometimes before receipts by service

delivery units) leading to delayed expenditures and un-spent balances at the end of

the financing year, (ii) under UPE and USE capitations and NAADs need to be

synchronised with the service seasonal cycles (although reviews have been done to

address this), (iii) weakness in staffing and facilitation of internal audit units have limited

the value of their reports, and (iv) support to Local Councils have not been adequate

to enable them exercise their oversight roles effectively.

A6: LOCAL REVENUE ENHANCEMENT

a) Local Revenue Performance

Whereas there have been several effort to improve local revenue collections levels,

their contributions to the LG budgets has remained low – at less than 3% for districts and

slightly higher for urban areas. Assessments have also shown that all local revenue

performance remains below 50% of total potential. This is largely attributed to the weak

institutional arrangements for revenue administration. The study also finds that changes

in sources, particularly with the abolishment of graduated tax, have reduced the

viability of revenues for LGs, and that the existing legal framework does not fully enable

LGs to collect revenues. In an attempt to compensate this shortfall, Government

introduced two new sources of revenue: the Local Government Hotel Tax (LGHT) and

the Local Services Tax (LST). The two newly introduced taxes have been unable to fully

compensate for graduated tax creating a financing gap of over shs.60 billion at the

time of abolition.

b) Recommendations to enhance the significance of Local Revenues

i. Design a National Local Revenue Policy supported by enabling clauses in the Public

Finance Act (once finalised) to guide local revenue generation and prescribe

punitive measure for negative political action that frustrate enforcement of local

revenue collection.

ii. Evolve administrative measures to improve efficiency of revenue management

through establishment of revenue management departments at the district level;

iii. Review the legal framework to enable more effective revenue realization

especially on addressing exemptions in LST, property rates, permits and user

charges;

iv. Review the current Royalties Act and guidelines;

v. Look at improving revenue sources but also enhancing the ability of LGs to

support Local Economic Development; and municipal bonds which ultimately

broadens the resource base for LGs. New sources proposed include:

o Property Service Tax [PST]that may range from Shs.30,000 to 100,000 per year

payable on a quarterly basis. This measure should be subjected to the

provisions of the fifth schedule part IV section 13(0) of Cap 243.


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o A solid waste management tax should be introduced in municipal councils

and Town councils to be assessed by respective LGs. A maximum amount

allowable may be determined by the LGs through a consultative process.

o Introduce a Residence Tax on permanent residential houses of between

Shs.10,000 and Shs.30,000 per year. This source alone would generate 30bn at

a minimum projected for 3million houses in the country.

A7: CLOSING DECENTRALIZED SERVICE DELIVERY FUNDING GAP

In general, as a measure to improve financing and its impact on services delivery,

priority should be given to gradually stepping up financing under the grants system to

local government to bring it more in line with the service delivery requirements. Special

emphasis should be placed on the adequacy of financing under the unconditional

grants to include the management functions of planning, supervision and monitoring of

service delivery as well as auditing, to enable Councils to execute their roles, and to

maintain LG infrastructure stock. This study estimates a financing gap of about 54%

under these functions translating to about Shs.2.1bn for an average district.

A8: THE REVISED FISCAL DECENTRALIZATION ARCHITECTURE

The proposed revised FDA as an output of this review aims to strengthen fiscal

decentralization by protecting and promoting local government financing, enhancing

orderliness and control in the management of intergovernmental fiscal relations,

strengthening LG capacity for supervision / monitoring of service delivery and

increasing discretion in local decision making. Key principles to guide the FDA shall be:

adequacy in financing of decentralized service;transparency and accountability,

predictability, equity, incentive to raise more revenues and avoid waste.Institutions will

be assigned roles clarifying their contributions to the implementation of the revised FDA.

Specific responsibilities relating to FDA include the following;

i. Parliament: will provide oversight over the implementation of the FDA and will protect

LG financing.

ii. Cabinetwill oversee the implementation of the FDA ensuring compliance of all MDAs

in its use.

iii. Office of the Prime Minister (OPM)will provide oversight over the implementation of

the FDA within guidelines set by Cabinet. OPM will resolve any policy, institutional

and operational conflict in the implementation of the FDA provisions.

iv. The Minister of Finance; shall be the champion, political head and owner of the

FDA.

v. The Minister of Local Government has the political mandate for implementing the

policy of decentralisation.

vi. Sector ministries shall remain the centres for policy formulation and monitoring.

vii. Development Partners (DPs): The Joint Assessment Framework (JAF) will be used to

monitor FDA reform implementation for the purpose of dialogue with the DPs on

local government financing

viii. Local Governmentswill implement the policy of decentralization through support

of planning, reporting and accountability of service delivered to citizens.

A9: THE LAWS AND REGULATIONS TO BE REVISED

The following laws will need to be revised as the recommended proposed in this study

are implemented

i. Article 193 of the Constitution of the Republic of Uganda

ii. Local Government Act Cap 243, First Schedule&Fifth Schedule Part 1 and Part 2

iii. Public Finance Bill (Draft)

iv. Budget Act

v. Royalties Act

vi. Local Government Finance and accounting Regulations

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1 BACKGROUND AND RATIONALE

1.1 Background

The 1995 Constitution of the Republic of Uganda (as amended), and the Local

Government Act (CAP 243) have devolved service delivery mandates to LGs. Line

ministries, under this framework retained the mandate of setting national priorities,

standards regarding the delivery of service, support supervision and mentoring of Local

Governments.On the other hand Local governments (LGs) have been, by law, preparing

own development plans and budgets, mobilizing their locally raised revenues (LLRs),

receiving releases from the Central Government (CG) to facilitate funding for recurrent

expenditure and development.

The Government of Uganda (GoU) is committed to reviewing Local Government financing

as one of the prior actions to be implemented within the Joint Assessment Framework. The

rationale is to achieve an effective and efficient financing mechanism for LGs that

addresses their core mandate and functions including service delivery. As one of the core

reforms to guide fiscal decentralization, a study was done in 2002 that designed Uganda’s

Fiscal Decentralization Strategy (FDS) which covered two inter-related dimensions: (i) the

division of spending responsibilities and revenue sources between tiers of government and

the amount of discretional power given to LGs to determine their expenditures, revenues in

delivery of decentralized services.

1.2 Rationale for the Review of Local Governments’ Financing

Over the years, significant progress has been made in the implementation of the

Constitutional provisions for local government financing. In the early years, this saw a steep

rise in grants from Central Government, rising in nominal terms, from UGX.37miliion in 1993/4

financial year (FY) to over UGX.244bn in 2000/01 FY. This has since further risen to over 1.6

trillion in 2011/12 FY. This steady rise reflects Government’s continued commitment to

financing local government services. As a result, the DPSF notes4, the level of service

delivery has increased tremendously. LG own source revenues have plummeted to

below3% contribution to district budgets following the scrapping of graduate tax after the

2005/06 FY.

However, there is widespread concern that LG financing is not sufficient to meet the level

of demand for service delivery. The 7th Joint Annual Review of Decentralisation noted that

while transfers were increasing in nominal terms, the trend in the key service sectors of

education, health water and roads “was declining and negatively affecting services in

LGs”5 particularly as the populations and inflations were rising rapidly. A recent paper on

Transforming the Uganda Public Service6points to the increasing inadequate funding of

local governments and the impact on their capacity to deliver key services. A 2009 study

by MoFPED - “Decentralization in Uganda-Does it improve service delivery” noted that

inadequate funding in the face of decentralization “had limited improvements to service

delivery”. The National Development Plan (NDP) noted the need to ensure adequate

financing for priority public service delivery7. The JAF II also agreed on an undertaking to

carry out holistic review of local government financing. Other assessments have expressed

4Decentralisation Policy Strategic Framework, Achievements of Decentralisation, page 22 5 7th Joint Annual Review of Decentralisation, 5.7(a) 6 Policy paper on the transformation of the Uganda Public Service, June 2010

7 Strategy 8 under the Public Sector Management thematic area (NDP, page 349)


similar sentiments.A second concern was the impact of changes in composition of local

government financing on its efficiency and accordingly effectiveness in supporting service

delivery. Various assessments8 have also pointed to reducing proportion of own source

revenues9 to the LG budgets which has increased the dependency of LG financing on

Central Government and further reduced discretional capacity of local decisions. In the

face of this dependency, the growing dominance of conditional grants has further

constrained LGs in aligning allocations to local priorities – a key tenet of the

decentralization policy. Besides, it also emerged that this structure of financing was

actually impacting negatively on efforts to expand local revenues levels10.

1.3 Objectives and Scope of the Study

After ten (10) years of implementation of the FDS, it was imperative to review the state of

local government financing focusing on its adequacy, efficiency in its delivery,

management and accountability. The objective of this study was to review financing of

local governments in Uganda with a focus on the match/ mismatch of financial resources

with decentralized responsibilities and the management and accountability for

decentralized service delivery. Specifically, the study requires that the following three

areas have to be addressed:

a) Reviewing implementation of Fiscal Decentralization Strategy (FDS) to-date;

b) Re-designing the current Intergovernmental Fiscal Decentralization Architecture

focusing on financial adequacy, management and accountability for decentralized

services; and

c) Presenting recommendations on measures to enhance the significance of local

revenues.

In addressing the areas identified above, the study limited itself to four (4) study areas

namely;

a) Undertaking a review of the Intergovernmental Fiscal relations (IGFR) between

central and local governments and between layers of local governments. This

review also covered an assessment of the implementation of the FDS and its effect

of the IGFR

b) Undertaking a review of the Annual Planning and Budget Cycle for local

governments and its interaction with the national planning and budgeting processes

c) Undertaking a review of the release, reporting and accountability mechanisms for

local governments including adequacy of institutional mechanisms; and

i. Undertaking an examination of opportunities to enhance revenue collected by LGs.

1.4 Organization of the Report

The report is divided into 10 chapters; This chapter 1 (one) has highlighted the background

and rationale and Chapter two discusses approach and methodology that was used in

the study while Chapter 3 reviews the implementation of the Fiscal Decentralisation

Strategy. Chapters 4 to 7 present the findings under each of the component of the study

as outlined in 1.3 above. Chapter 8 presents an analysisof local service delivery while

Chapter 9 presents the re-design of the Fiscal Decentralisation Architecture (FDA). Chapter

10 is a display FDA implementation matrix showing timelines for implementing various

recommendations of this report and the responsibility centres. The report ends with

appendices showing the level of consultation done in arrival at the study results.

8 For example, NDP (8.14.2, (v)) 9 OSR are estimated to have fallen to as low as 3% despite various national interventions in recent years including introducing Local

service tax and LG hotel tax- Technical Note on the Review of Local Government Financing, March 2011 10 Fiscal Decentralisation, the way forward (6.9), 2000


2 APPROACH AND METHODOLOGY

2.1 Introduction

The Local Government Finance Commission utilizing basket funding under the Second

Financial Management and Accountability program (FINMAP II), contracted EFICON

Consulting Ltd, a regional Consultancy firm based in Kampala to undertake the review of

Local Government Financing focused on the theme: “Adequacy of financing, effective

management and accountability for decentralized service delivery as well as

enhancement of local revenues”. This study was supported by a thorough review of

background information mainly since 1993 to-date relating to a situational analysis of

financing of LGs; scrutiny of the functions and assignments to LGs as per the LG Act Cap

243; status of the level of efficiency and effectiveness of service delivery and challenges

and constraints that warrant a review in Uganda’s decentralization system.

2.2 General Study Approach

The consultancy for the review of Local Government financing took the following four

major stages:

a) Consultants held preliminary meetings with key stakeholders at the national level and

reviewed key literature around fiscal decentralization that culminated in the

elaboration of an Inception report. A review of existing literature was undertaken to

inform the study of the background including on policy, institutional and legal

aspects, to clarify the problem areas and explain past efforts in addressing key

problem areas. The list of documents reviewed in this process is provided in Annex 4

of this report. LGFC instituted a Taskforce to guide this study. The taskforce drew

membership from various stakeholders including Urban Authorities Association of

Uganda, Uganda Local Governments Association, Ministry of Finance Planning and

Economic Development, Ministry of Local Government, National Planning Authority,

and Local Government Finance Commission among others;

b) The Consultant designed study tools and questionnaires to obtain data from national

and local government respondents. This process was preceded by a pre-test of

study questionnaires in Entebbe Municipality and Wakiso District Council. The

questionnaires were improved following the pre-test and used to gather information

in study LGs; 12 districts, five (5) Municipal Councils, four (4) Town Councils and seven

(7) Lower Local Governments as shown in the Table 2.1 below. The study also

expanded to service delivery points in health, education, water and roads. The LGs

included in the study were identified using the following criteria:

A sample big enough to be statistically significant to represent all 111 LGs in

Uganda;

District representation from all four regions of Uganda;

Representation of a mix of urban (town council, municipalities) and rural LGs;

At least three (3) LGs denoted as ‘hard-to-reach’; and

A combination of LGs in existence before 2005 and newly created LGs


Table 2.1 Showing LGs and LLGs covered under the study Local Governments Municipal

Councils

Town Councils Sub Counties

1. Wakiso

2. Masindi

3. Moroto

4. Kalangala

5. Kisoro

6. Mpigi

7. Soroti

8. Kapchorwa

9. Namayingo

10. Arua

11. Oyam

12. Luweero

13. Kiruhura

1. Entebbe

Municipality

2. Arua

Municipality

3. Lira

Municipality

4. Soroti

Municipality

5. Masindi

Municipality

1. Mpigi Town

Council

2. Namayingo

Town Council

3. Kiruhura Town

Council

4. Kapchorwa

Town Council

1. Kammengo Sub County

– Mpigi Local

Government

2. Acaba Sub County-

Oyam

3. Buswale Sub County –

Namayingo LG

4. Nadunget Sub County –

Mororo Local

Government

5. Wakiso Sub County –

Wakiso Local

Government

6. Logiri Sub County – Arua

Local Government

7. Kamdini Sub County-

Oyam Local

Government

Note: Prior to the start of the study, a pre-test of study tools was conducted in Wakiso

District Local Government, Wakiso Sub-country and Entebbe Municipality before

being rolled-out nation-wide. It is important to note that while it would have been

desirable to cover a larger sample, the study focus was inclined to the structure,

systems and modalities of LG financing. In this case therefore, 13 districts visited were

meant to provide evidence case studies.

It was important for the study to be conducted at LG level and to link the LGs to the

broader sector and national local government issues related to decentralized

service delivery but also for the consultants to get first-hand accounts of the status of

implementation.

c) Data collected and analysed was processed into a draft report. The analysis of

findings was triangulated with sector Ministries, Departments and Agencies (MDAs)

as well as LFGC and MoFPED before finalizing the report; and

d) Final Draft report was validated at a stakeholders’ workshop and submitted to the

LGFC.

2.3 Sector Case Studies

To better understand and analyze the current grant system, inter-governmental fiscal

relations, and the challenges related to fiscal decentralization, all key sectors of

government were consulted. While all sectors were included in the review, particular

emphasis was given to education, health as well as water and roads sub-sectors to

examine the following issues regarding the FDS:

a) The optimal in-sector allocation between central and decentralized budgets;

b) The current allocation criteria for LG budgets and the impact on the broader

development issues such as (population, poverty incidence, effective administration,

etc.) in regards to expenditure assignments and relevancy of grant parameters;

c) The service delivery units in LGs to determine what they currently receive vis-à-vis the

budgets and identify gaps in financing and the related accountability mechanisms;


d) The challenges and proposed recommendations for broader governance issues

such as management, operations and maintenance; and

e) Options for local financing of service delivery.

2.4 Data Analysis and Validation of Findings and quality assurance

The study utilized three levels of data:

a) Secondary data notably District Budget Framework Papers, District Final accounts,

and District Development Plans; Sector Grant Guidelines and Annual Sector Reviews;

Local Government Finance Commission Resources (including the database) and

other literature as elaborated in Annex 2 of this report.

b) Primary Datawas collected during structured and semi-structured interviews in

selected districts and with sectors at the national level and later triangulated as

appropriately for the analysis made in this report.

Qualitative and quantitative data approaches were adopted. Information from field

interviews (primary data) was then analyzed in lieu of the content analysis described to

generate results and findings presented in this report. The study also used observation,

photography, and videography to record and strengthen survey findings. Guided by the

terms of reference, the study adopted a thematic approach in reporting the findings.

Each of the chapters in this report is a unique aspect of the survey terms of reference.

Data collection and analysis was cognizant of these themes as presented in sub-section

1.3.

To ensure the relevance of the findings and recommendations of this study and its

implementation thereafter, oversight of this study has been provided by Government

through the Local Government Finance Commission (LGFC) at the policy and technical

level. Input from Development Partners (DPs) has been channelled through the Joint

Budget Support Framework (JBSF) coordination mechanism that also included consultation

of non-JBSF DPs. At the policy level, the study has been chaired and steered by the PS/ST

MoFPED with policy steering members consisting of a task force with representation from

Local Government Finance Commission, Ministry of Local Government, Ministry of Finance

Planning and Economic Development, National Planning Authority, Office of the Prime

Minister, Uganda Local Governments Association, Urban Authorities Association of

Uganda, Ministry of Public Service, as seconded from line ministries.

The task-force has reviewed the findings and recommendations of the consultants and the

Policy Steering Committee will take action through appropriate Government of Uganda

(GoU) mechanisms through the LGFC and MoFPED and then on to Cabinet. Validation of

this report has been done with presentation and reviews made with the following

stakeholders:Local Government Finance Commission;Ministries of Local Government and

Ministry of Finance Planning and Economic Development; National Planning Authority;

Uganda Local Governments Association and Urban Authorities Association of Uganda;

Development Partners; and Other sector level and MDA representatives through National

Consultative Workshop.

2.5 Study Limitations

The lack of a robust process for the continuous updating of data at all levels of

government continues to be a limitation for studies of this nature. While the consultants

were supported at the national level to obtain all needed information, it is apparent that

data availability at both HLGs and at LLGs remains a serious challenge.


3 REVIEW OF FISCAL DECENTRALIZATION STRATEGY

This Chapter provides a brief review of the decentralization policy framework and the

Fiscal Decentralisation Strategy (FDS) outlining its motivations and goals as well as the

progress in its implementation. The Chapter also discusses the conditions warranting the

performance review and makes a case for Government to continue implementing the key

principles contained in this strategy.

3.1 The Uganda Decentralization Policy

Uganda’s current decentralization framework traces its roots to the enactment of the

Resistance Councils and Committees Statute11. The Statute introduced the Resistance

Council system, which in effect transferred authority to plan, make decisions, administer

local justice and provide services to the communities. Reviews of this statute and other

subsequent instruments led to the development and adoption of the 1995 decentralization

policy note12. The objective of the framework was to make local governments effective

units for local democratic governance. The 1995 Constitution further consolidated the

decentralisation policy, ensuring its application at all Local Government levels13. The Local

Governments Act, 199714, further elaborated the establishment of the LG system and

structures, responsibilities for service delivery, LG revenue sharing arrangements, the

election procedures for local leaders, and the responsibilities for local service delivery.

Uganda’s decentralisation policy was premised on the devolution principle transferring

responsibilities for decision making and delivery of services to local governments which

elect their own councils, and allowing these councils autonomy in making investment

decisions. The devolution principle was also to foster a participatory approach with

communities playing a direct role in identifying their development priorities, in planning

and in formulating their programmes. Functions for which responsibilities were devolved to

local governments are outlined in the Local Governments Act (Cap243) – second

schedule. The decentralisation framework also identifies sources from which local

governments may obtain revenues to finance these functions. These include: (a) own

source revenues, (b) grants from Central Government, (c) contributions from donors or

other agencies including NGOs, and (d) borrowing.

Significant progress has been achieved in implementing the decentralization policy in all

aspects; political, administrative and financial. However, in early 2000s, the Government

became concerned about the emerging trend of fiscal transfers and the impact they

were beginning to have on the critical elements of the devolution principles namely local

autonomy, participation and accountability in decision making. As local government

financing evolved, grants from Central Governments had become the dominant source of

financing accounting for over 90% of local government revenues. This led to a high

dependence of local governments on Central Government15. The growth in transfers from

national budgets was largely in the area of conditional grants – accounting for 67% in

11 Resistance Councils and Committee statue of 1997 12 See Chapter 2 of the Decentralisation Policy Strategic Framework, Nov 2006 13 The Local government system has up to four levels of local governments including districts or city councils, municipalities, sub-

counties and town, parishes or wards, and villages or cells 14In this report, the LG Act 1997 is quoted synonymous to LG Act Cap 243. 15 LG PFM Assessment, 2005


2000/0116. Conditional grants did not only grow in volume of resources but in diversity as

well; by 2000, the number of conditional grants had grown to 21. In comparison, the un-

conditional grant was at 32% of transfers from the national budget and even smaller was

the equalisation grant at 1%.

The excessive growth in conditional grants was limiting LGs’ autonomy in planning and

decision making. It was affecting local governance and development and impacting

sustainable implementation of the poverty alleviations commitments under the Poverty

Eradication Action Plan (PEAP)17. LGs experienced excessive administrative overheads as

they implemented multiple procedures, bank accounts and lines of reporting introduced

as a result of increasing number of conditional grants. Central Government was equally

affected as sector ministries had to dedicate more time and resources to accountability

procedures associated with the grants including having to deal with increasing loads of

quarterly reporting from local governments.

3.2 Imperatives and features of the Fiscal Decentralisation Strategy

The adoption of the Fiscal Decentralisation Strategy (FDS) by the Government, in 2002, was

to address these concerns and in particular, to streamline transfer modalities to increase

local autonomy and participation “whilst reinforcing the incentives to improve local

governance and service delivery”18.

The objective of the Fiscal Decentralisation Strategy (FDS) was:

“To strengthen the process of decentralisation in Uganda through increasing local

governments’ autonomy, widening local participation in decision making and streamlining

of fiscal transfer modalities to local governments in order to increase the efficiency and

effectiveness of local governments to achieve PEAP goals within a transparent and

accountable framework”.

The FDS set two broad objectives: a) to increase local government autonomy and

widening participation in decision making, and (b) to improve the effectiveness of the

local government programmes through increased effectiveness, transparency and

accountability in expenditures (see Box 1 below). The main strategy was to streamline the

funds transfer mechanisms channelling grants through two systems; the Recurrent Transfer

Budget (RTB) system and the Development Transfer Budget (DTB) system, to improve the

balance between discretion and non-discretionary financing of local governments. The

FDS was to lead to an overall reduction in the number of conditional grants while at the

same time providing increased flexibility and the participation of LGs in decisions of

allocations of these resources. Accordingly, sector policies and procedures governing the

transfers during the budget cycle, as well as the financial and accounting regulations were

to be reviewed to support the implementation of the new transfer mechanisms

Box 3.1: Key focus areas of FDS

Key Objective I: Increasing Local Government autonomy

16 The growth in conditional grants was in part accounted for the Government’s commitments under the Poverty Action Fund itself

which was established to direct debt relief and donor resources to key poverty alleviation sectors with the majority of services

located in local governments 17 The PEAP was Uganda’s policy framework with a major focus on poverty alleviation. This was replaced by the National

Development Plan (NDP) in 2010 18 Terms of reference – “Fiscal decentralization– the way forward”


Promoting and widening participation in decision making of local government, to

enhance the efficiency in allocation of resources towards the achievement of PEAP

Goals in line with local priorities This will be achieved by:

Increasing the discretionary powers given to local governments in allocating

resources towards both recurrent and development activities;

Promoting increased participation of all levels of local government in the

decision making process;

Providing direct financial incentives for local governments to increase local

revenue, and ensuring that local revenue contributes meaningfully to local

development; and

Harmonising the central and local government planning and budgeting cycles

to ensure that local needs and priorities do feed back into the national budget.

Effectiveness of Local Government programmes

Improving the effectiveness of Local Government Programmes through

strengthening the effectiveness, transparency and accountability of local

government expenditures. This will be achieved by:

Streamlining the systems of transferring funds from the centre to local

governments;

Developing a strong framework for financial accountability and increasing the

focus on book keeping;

A simple system of reporting on financial and output information;

Rewarding those local governments which implement programmes well, in

adherence to the legal and policy framework, and sanctioning those which do

not; and

A more co-ordinated and better targeted system of monitoring and mentoring

local governments by Central Government.

3.3 Experience in implementing the FDS

The experience in implementing the FDS has been mixed. Ten (10) years after the launch

of the FDS, progress in its implementation has been strong in some areas, slow or less

satisfactory in others.In particular, the key reforms that were to lead to achieving the key

objectives of discretion and participation in allocations decisions under the FDS have not

been implemented. The box below lists some of the views from stakeholders sectors on the

implementation of the FDS

Box 3.2: Sector view on implementing the FDS

Implementing flexibility / discretion

The FDS require the Government to implement the flexibility principle to increase the

ability of LGs to allocate grants to local needs.

Education:

- Flexibility was not helping. The Ministry had to pull out of flexibility as the sector

was becoming a net looser – because of its big budget, and it was not likely to

meet its targets

Water :

- There was not enough sensitization and the sector felt they were losing out to

other sectors

Local Governments

- Implementation of flexibility was to depend on gradual expansion of capacity but

this was not implemented

Reporting Arrangements


The FDS require government to introduce harmonised reporting to reduce the burden

experienced by LGs in implementing multiple reports required by Central

Governments ministries. The use of “Form B” reporting under OBT has recently been

introduced for this purpose

Education

- LGs submit quarterly financial monitoring reports to MoFPED which are sent to

MoES. Compliance is less as was the case where LGs were sending to sectors and

then LMs send to MoFPED. Also, OBT reports are good but limited in information

provided to sectors. Sectors unable to use them for assessing service delivery

qualities.

Water

- OBT reports do not provide sufficient details on indicators to facilitate monitoring

service delivery. The indicators used by LGs in Form B are not in conflict with the

reporting requirements of the sector

LGBC / LGROC

The FDS requiredGovernment to establish new committees to improve coordination

between central and LGS on LG financing issues. Sectors had the following views on

the two committees

Water

- LGBC and LGROC are not very visible in the budget process and have not been

very effective

Education

- Interaction takes place with LGBC but its role in the budget process is not clear

Gender

- LGBC has not been helpful in advocating for increases in grants or for integrating

donor support in the sector

Institutional arrangements in the implementation of the FDS

The FDS assigned responsibilities to each key institution to implement reforms that

were introduced

Local Governments

- FDS was failed by line ministries. Sectors became strong as they received more

control over financing and as donors directed their support to them in the context

of the sector wide approach (SWAP). There is need to address the resistance of

line ministries if FDS is to work

Status and performance on key goals of the FDS

Table 1: Performance on key goals of the FDS

Objectives Performance

1. Streamlining the Grant system

The key objectives were to reduce

the number of grants to two (2)

per sector (RTB/DTB) and increase

the level of discretion and flexibility

to allocate resources within the

sector grant. Sectors were review

• Grading: Low

• Rather than reduce the number of grants more

conditional grants have been created since the

FDS came in effect

• Guidelines for sector policies on conditional

grants as well as on operational modalities under

the FDS were issued to sectors. However, sector



sector policies to provide one set

of conditions and one IPF

did not review policies to reduce the number of

grants or to transform them to conform to FDS

modalities

2. Flexibility

Sectors were to identify a portion

of conditional grant (initially 10%

and 50% for PRDP) under the PAF

services which was to be placed

in a common pool. Local

governments would then exercise

flexibility over this pool allocating

to priorities of their choice within

the PAF services. Grant ceilings

were to be adjusted to reflect the

LG allocations from the pool. The

proportion to be placed in the

pool was to be increased over

time as local governments’

capacity and performance

improves.

Grading: Low

Flexibility as was conceived did not work. Flexibility

between sectors was introduced for PAF recurrent

grants in 2006/7 and abolished by Cabinet in

2008/09. Development grants did not adopted the

LGDP modality which was to provide greater

flexibility to LGs:

The Education sector objected as in its words, “it

was becoming a net loser” and was falling back

on its targets. In sector reviews, it was clear other

sectors, including Water, were also equally

apprehensive about losing their levels of

financing.

The expansion in the number of conditional

grants increased the focus on detailed outputs

and therefore reduced the opportunities to

participate in flexibility.

“Flexibility” was not fitted in the existing cycle.

Adjustments in IPFs were not made timely by

MoFPED to reflect changes by LGs. This meant

the level of resources in the flexibility pool could

not be ascertained until late. This rendered the

process useless

However, beginning 2011/12, the PRDP which is

multi-sector grant, adopted a flexible approach

based on the LGDP/LGMSD concept. Beneficiary

LGs will now have the flexibility to determine their

sector allocations of within the PRDP ceiling

which is then fed back to the national planning

process

3. Harmonising annual planning

and budgeting process

Harmonising the central and local

government planning and

budgeting cycles to ensure that

local needs and priorities are fed

back into the national budget

Grading: High

The LG planning and budgeting processes were

reviewed to feed into the national process. HLG

Guidelines for planning and budgeting were issued

and training provided. As a result, better links have

been established between national and local

government budget process and between LG

budgets and work-plans. This is supported by the LG

BFPs and the Output Budgeting Tool (OBT). However,

capacity building efforts will require to continueto

enable better utilisation of the OBT and to improve

the accuracy and utilization of information recorded

by it.

Given that LGs depend on the national budget

process for up to 95% of their revenues, the delay in



issuing budget guidelines by Central Government is

major constraint to the proper implementation of the

LG budget preparation process.

4. Increasing local participation

Promoting increased participation

at all levels of local government in

the decision making process.

Participation was to incorporate

the lower local governments in the

planning and accountability

processes.

Grading: Moderate

The annual planning and budget process for local

governments were reviewed to incorporate lower

level planning and to synchronise them with the

national planning and budget process. However,

there are factors that continue to constrain

participation among them:

the low level of financing for this process; LGs at

all levels often do not have the financing to

enable the levels of consultations on investment

activities and to report back to communities;

the limited discretion means that LGs are

constrained to implement priorities and

objectives provides by sectors. This provides very

limited opportunity for dialogues at LGs; and

Delays in issuing budget guidelines and IPFs have

often led to a reduction in the amount of time

available for participation and dialogues for LGs.

5. Releases

Introduce monthly releases and

quarterly reporting for recurrent

transfers and quarterly releases

and reporting for development

transfers

Grading: moderate

The release system has been considerably

transformed from monthly to quarterly for all transfers

except for salaries. Quarterly reporting is necessary

for quarterly releases.

However, major delays remain and predictability is

still low (see Chapter 6)

6. Harmonizing reporting

Putting in place a simple system of

reporting on financial and output

information reducing the burden

on local governments to respond

to different reporting requirements.

Key implementing agencies

MoFPED / Sectors

Grading: Moderate

FDS formats for reporting were issued linking financial

to performance data. The recent introduction of the

Performance Form B builds on earlier efforts. Form B

includes reporting sections for each sector. It also

combines both financial and performance reporting

and has been implemented across all HLGs.

The survey reveals that most sectors continue to

require sector specific reports because Form B does

not provide enough details to meet their monitoring

purposes. In the same way, in recent years, the

Uganda Road Fund has also introduced its own

reporting formats to link its disbursements better to its

processes. However, in line with the new guidelines

on releases, sector specific reports are not to be

used for the purpose of releases.



7. Financial Accountability

Key Implementing agencies

MoLG / MoFPED

Developing a strong framework for

financial accountability and

increasing the focus on book

keeping.

Grading: High

Whilst the RTB/DTBsystem was not implemented, the

number of bank accounts for each HLG has been

reduced to 12. Financial accountability systems in

local governments have greatly improved. New

financial and accountability regulations and

manuals were introduced in 2007. Further,

automated financial management systems have

been implemented in 14 LGs. The internal audit

function has improved, and external audits for all

districts and municipalities are up-to-date.

3.4 Conditions affecting the implementation of the FDS

The section below enumerates some of the key conditions identified to have influenced

the performance of the FDA above

a) Institutional roles

Lead role: The FDS stipulated the roles of various Central Government institutions in its

implementation; however, it was not categorical on the overall leadership – the

Champion. Rather implementation of FDS was to be coordinated through committees; the

Local Government Budget Committee (LGBC) and the Local Government Release

Operations Committee (LGROC). For this matter, the FDS remained largely external to

existing institutional mechanisms and not properly integrated within existing processes and

systems. It should be noted that progress in implementing activities that were more aligned

with existing institutional roles was more satisfactory than where cross-institutional effort was

required.

LGROC and LGBC committees have not been very effective in their coordinating function.

There were delays in establishing the committees, following the passage of the FDS. This

gap led to a loss in the momentum of implementation. Moreover, support for the

functioning of these Committees was not clarified. The LGROC met only in joint sessions

(three times) with the LGBC between 2003 and 2008 and even then, these meetings were

not chaired by MoFPED. It has only become more active in recent years particularly as

Form B was being introduced. The LGBC has itself performed much better and has been

successful in championing the harmonisation of the LG annual planning and budgeting

framework, including developing guidelines for the LG process, the LGBFP and sector

guidelines. Sectors have also found the LGBC to be very helpful in following up on

LG/sector issues for inclusion in the national BFP. However, the LGBC has been less

effective in lobbying for the implementation of some of the major FDS reforms such as

streamlining grants.

MoFPED and the FDS: The FDS did not gain the profile within the MoFPED that was assumed

during its design. The LGROC, which was to be chaired by MoFPED, did not function as

planned. The intention was that the Ministry would also strengthen its Decentralization

Section to support the LGROC and fiscal decentralization in general. This process did not

happen; for a long time, the section, headed at principal level, had less than three staff

and was clearly overwhelmed by the level of work in relation to releases. Importantly,

assigning MoFPED to head a the LGROC which focussed on day to day operation and less

on strategic issues may have limited its interest and been responsible for the low profile of

the FDS within the Ministry.


Sector Ministries: in 2002, at the time of passage of the FDS, sectors were a relatively new

creation, few in number and still weak internally some with no sector working groups

(SWGs). Over the last 12 years, sectors have greatly expanded in number, established

internal structures and have become strong centres of planning, decision making and

implementing sector policies. Sectors, as a result, have become critical centres of power

attracting development partners and other groups.

However, as sectors developed, there was insufficient guidance on integrating the FDS

into their processes; the rules for defining new transfers have not been clear and there

were no mechanisms to sanction non-compliance with the FDS modality (see Box 3.2

below). Accordingly, the rise in the number of grants and less willingness to implement the

provisions for streamlining grants is partly attributed to the weak integration of the FDS in

the sector processes. Moreover, sectors do not see a clear incentive to implement these

reforms since they see themselves to be responsible for achieving sector outputs and

outcomes. Roy Balhin his paper on Implementation rules for fiscal decentralisation

observes that “giving LGs significant control over the expenditure budgets reduces the

control that can be exerted by line ministries and shifts the balance of power away from

the centre”. Despite the FDS modality, Development Partners, working through sectors,

continued to operate in a form that was not compatible with the FDS as exemplified by

the extract in the box below.

Box 3.2: An extract from the LGBC report April 2003

FDS Compliance – Donor Agreements

In the course of the FDS sector policy reviews, it has become apparent that there are a

number of existing bilateral and multilateral agreements that do not allow for FDS

compliance in respect of modalities.In short, these agreements have at their core the

concept that the GoU agreed to implement a programme or project as designed in the

agreement that requires the GoU to dictate programmes, projects and associated

modalities to LGs. When those funds come into the GoU budget process and are

designed for distribution via the conditional grant process, this means that the GoU has

agreed to a process that is not FDS compliant in any way.

b) Processes and systems

Implementation of the FDS was also hindered by the systems and processes:

- Control over the budget calendar particularly to allow for timeliness in activities

enabling integration between the national and local government cycles was not

exercised with the rigour it required for the FDS. Delays in issuing IPFs reduced the

chances to improve the effectiveness in implementing the flexibility principle and the

time available for local government participation. The implementation of the

budget calendar was thus less amenable to the FDS requirements;

- There was less effort to integrate the FDS modalities in the full financial management

systems. For example, the introduction of a revised Chart of Accounts in 2003

provided an opportunity to embed the FDS transfer mechanisms by aligning the

classification for grants to the RTB/DTB mechanisms or at the very least, to provide a

guide and control over the expansion of the number of grants. This was not done. As

it is, the number of grants continues to expand and classifications assigned without

proper guide;


- Most allocation formulae are needs based. As discussed under Chapter 4 in this

study, allocations have not grown over time, and in fact shrank in real terms per unit

allocations. Most growth has been in salary grants which are earmarked. Non-wage

sector grant financing continues to fall below the cost of service particularly as LG

populations expand. This has meant that opportunity for implementing flexibility or

providing more discretion to local governments has over time continued to diminish;

- The annual local government assessments are well institutionalized, the results of

these assessments, which measure improvement in capacity of local government,

have not been used to inform and influence Central Government’s decisions in

implementing flexibility and discretion in the grant system as was intended. The

results have no bearing on decisions on FDS reforms. This assumption in the FDS thus

failed.

c) Emerging changes

There are several developments that have over time made it more difficult to implement

the provisions of the FDS relating to streamlining the fiscal transfer system. Over time,

conditional grants have become more responsive in terms of the allocations and their

guidelines. The system of releases (from monthly to quarterly), accounting and reporting

has improved with the strengthening of the capacity of the LGs. The number of bank

accounts is less of an issue today as these have been greatly reduced. The IFMS, where it

has been implemented, has improved the capacity of LGs for financial recording and

reporting. Direct transfer of salaries to staff and releases in the case of secondary school

has greatly improved delivery systems. All these aspects have combined to improve

certainty about flow of funds and to report on them.

3.5 The forward for the FDS

In view of the above findings, the study recommends that

the key principles of the FDS remain valid and should continue to be implemented. These

include the principles of local autonomy, local participation, and discretion in local

decisions

these principles should be incorporated into the new framework, the fiscal

decentralisation architecture (FDA) but using practical modalities of implementation.

The FDA will be the vehicle for implementing the principles that are retained. Details

of these proposals are identified in table 3.3. below and are addressed in Chapter 9

Table 3.3: Key actions to take forward from FDS

Key Objective Approach / action

General

Leadership of

the FDA

Assign a champion to spearhead the FDA; to supervise its

implementation ensuring compliance by all actors with its

implementation

Key Objective I: Increasing LG autonomy

Streamlining the

Grant system

Discard the RTB/DTB system and set guidelines to reduce the number

and restrict the expansion of grants

Increasing

discretionary

powers of LGs in

allocating

resources

Sector based flexibility

Sector conditional grants are often very narrowly focused. There is

need to continue to pursue flexibility within each sector grant through,

among others, reviewing the allocation formulae to make it more

output oriented and reducing the number of grants within the sector.

Cross sector flexibility


Key Objective Approach / action

Flexibility across sectors, as proposed under the FDS should be

dropped. The number of conditional grants should not grow but the

funding should be increased. More funding should be provided to the

unconditional grant

Increasing local

revenues

ensuring they

contribute

meaningfully to

local

development

Support and Capacity building

Greater focus should be placed on existing revenue sources rather

than new ones. Central Government needs to increase its support to

improve administration and management of local revenues.

Central Government needs to institute policies that bar political

interference. Other measures are discussed further in Chapter 4.

Key Objective II: Effectiveness of LG programmes

Better targeting

of the grants

towards poor

LGs

Grant allocation criteria

While allocation criteria for a range of grants have improved, more

needs to be done to make them more responsive to poverty and

population factors in addition to policy objectives. Sectors should be

compelled to adopt more transparent and equitable allocation

formulae. All Central Government financing should follow transparent

processes of allocation and transfer. This will reduce regional

disparities. The formulae should give special consideration to

addressing urban LG challenges

Increased

participation at

all levels of local

governments

Annual Planning and Budgeting cycle

Improve control over the cycle ensuring adequate time and funding

are provided for bottom up consultations at all levels of LGs

LGs should be compelled to improve levels of financing for

participatory planning and budgeting process to encourage greater

consultations with communities. Include a monitoring mechanism for

the participatory planning

Strengthening

accountability

Local accountability

Efforts to improve systems to facilitate accountability and reporting,

including the introduction of Form B are well under implementation.

Reporting and accounting to Central Government as well as

coverage of audits have improved greatly. However, local

accountability will require more effort, enabling regular meetings of

local councils and addressing their capacity for oversight among

others


4 INTER-GOVERNMENTAL FISCAL RELATIONS

4.1 Introduction

The Local Government Act Cap 243 (Second Schedule) elaborates functions to be

performed by each level of government. Functions assigned to Central Government relate

primarily to policy formulation, guidance and monitoring while local government take

responsibility for delivering decentralized services.The Intergovernmental Fiscal Relations

(IGFR) defines the framework of fiscal operations which support the implementation of

functions allocated to each level of government. Under the framework, sources of

revenue are assigned to Central Government and to LGs19. In addition, a system of grants

from Central Government to local governments is established under the Constitution to

address a vertical fiscal imbalance between the functions and revenue sources assigned

to local governments. Between layers of local governments, vertical imbalances are

addressed through a system sharing of proceeds from locally raised revenues20 or grants

from Central Government21. This package of locally raised revenues and receipts from

grants and other sources, donor or otherwise, constitutes the framework for local

government financing22

The legal framework for the IGFR above has been largely operationalized. The system of

grants from Central Government; unconditional, equalisation and conditional grants, has

been implemented. Transfer mechanisms within the local government system have also

been established allowing for the sharing of locally raised revenues and Central

Governmentgrants between levels of local governments.

This section reviews the management and operations of IGFR and examines the extent to

which the system of grants has been effective in contributing to local government

financing and local service delivery. The section proposes recommendations to improve

the effectiveness of the IGFR and to enhance its support to local service delivery

4.2 Key Findings Associated With the IGFR

LGs’ financing increased only marginally from 3% to 4% of GDP between 2001/02 and

2010/1123.Since 2001/02 grants (both conditional and unconditional) from Central

Government have become the dominant source of revenue accounting for over 95% of

total local government financing24. This overwhelming dominance has had major

implications for local government service delivery; almost entirely, LGs depend on Central

Government grants to finance their operations and services. Therefore, how these grants

are structured and delivered becomes critical to the efficiency of local government

financing and operations of local government budgets, as well as effectiveness in

supporting local services delivery. The study identified the following key findings in relation

to the grants system and to intergovernmental fiscal relations in general:

a) The existing legal and institutional mechanisms have not been adequate to protect

and ensure appropriate growth of Central Government grants reducing the amount

of funding available to local services over time;

19 Refer to Second Schedule of the Local Governments Act 20 Rates for sharing locally raised revenues are defined in the section 85 of LGA 21 Central Government, through rules on each grants, guides on the sharing between higher local government and lower local

governments 22 The framework includes borrowing, see section 84 of the LGA, but this sources has hardly been exploited 23 Source MTEF (MoFPED) and LGFC local revenues database 24Technical note on review of Local Government Financing in Uganda, Section 2, background


b) The organisation of LG financing has limited the resources at the discretion of LGs

and which LGs can put to the management of services thus creating gaps in the

supervision and monitoring of services delivery and in the maintenance of service

delivery infrastructure;

c) Whereas functional responsibilities between central and local government are

outlined in the LGA, overtime, grey areas or areas of overlap have emerged that will

require further review;

d) The rules governing the grant mechanisms are not clear leading to arbitrary

procedures in their creation, allocation criteria and management with adverse

impacts on equity and on their effectiveness to finance local services; and

e) There are significant levels of financing from the national budget for local

government services but which do not flow through or comply with the rules of the

grant system. This is undermining transparency and equity in allocation of resources

across LGs and weakening local accountability.

These findings are discussed in details in the sections below.

4.2.1 Inability to fully implement key legal and institutional mechanisms

4.2.1.1 Growth of the Grant system Existing legal and institutional mechanisms to protect and ensure appropriate growth of

Central Government grants over time is not being followed.

The Constitution, Article 193(2) requires grants to LGs to be adjusted for general price

changes and for new services on an annual basis25 to maintain consistency in the level of

financing over time.Total direct Central Government transfers to local governments have

increased in nominal terms over the past 10 years from 244bn26 in 2001/02 to over

1.64trillion in 2012/13. However, as shown in Chart 4.1 below, the growth in unconditional

grant has not been consistent with the Constitutional provision (Seventh schedule)

requiring that “for a given fiscal year the unconditional grant shall be equal to the amount

paid to local government governments in the preceding fiscal year for the same items

adjusted for general price changes plus or minus the budgeted cost of running added or

subtracted services”.

Chart 4.1: Growth in un-conditional grant compared with requirement of the Constitutional

Source data is LGFC database

25 The Constitution, article 193 and seventh schedule 26 Figures used are derived from the LGFC database


In the Chart 4.1, the green line represents the growth (in nominal terms) if the Constitutional

provision (Seventh Schedule) was followed. The blue line shows the trend in actual

allocations over time. In 2009/10, the allocation under the un-conditional grant was

UShs.141.5bn. If the Constitutional formula had been followed, this would have been at

least UShs.186.7bn

Moreover, the amount for the unconditional grant at the start of the fiscal decentralisation

programme in 1994/5 was not based on the estimated costs to deliver the specified

services at the time. This base figure was low. If, going by the computations in Chapter 8,

Table 8.7, the unconditional grant were assumed to contribute to management services

only, a more realistic figure for 2009/10 would be about 280bn- which is double the

allocation in the year. As such, even with strict application of the Constitutional formulae27

on unconditional grants, it the base figure for the UCG would need to be significantly

increased to create the desired impact.

The unconditional and the non-wage recurrent conditional grants, both which are critical

to routine supervision, oversight and management of services, have not grown in real

terms28 over the period (see Chart 4.2below). As shown by the chart, there is hardly any

growth in real terms in these grants over the period 2000/01 to 20101/11.

Chart 4.2: Trend in Unconditional grant and selected grants in real terms (UShs.billions)


In chart above, the vertical axis is Shs.(billions). The chart shows the trend in releases under

unconditional grants and the combined sum of PHC-non wage, UPE capitation grant, rural

feeder roads urban water and rural water and sanitation conditional grants.

The pattern in growth does not compare with the significant growth (nearly double in real

terms29) in Central Government spending over the same period. Chart 4.3 below shows

27 The Constitutional formula provides in Seventh Schedule computes the UCG amount due in a given financial year as Y0 + bY0 + X1 where

Y0 is the UCG amount for the previous financial year, b is the % change in price levels and X1 adjustments for additional or subtracted

services. Y0 was never determined on the basis of realistic requirements of each LG 28 The decline is estimated at about 10% over the period 29 MTEF figures – source MoFPED


that growth in grants to local government does not match the growth in national

expenditure outturns.

Chart 4.3: Central Government transfers compared growth in national budget expenditure

levels


The chart shows that the ratio of spending held at the centre compared to transfers to LGs

has been widening from a ratio of 1:3 to now 1:7 over the last ten years. Table 4.1 below

provides figures to support this graph. The table also shows that the level of transfers to

local governments in comparison to expenditure and revenue out-turns have been

declining in percentage terms over the period.

Table 4.1 Share of National Revenues and Expenditure

Period Transfers

to LGs

National

Expenditure

outturn

National

Revenues

and grants

% of transfers

against

expenditure

outturn

% of transfers

against national

revenues and

grants

2003/04 741 2,990 2,814 25% 26%

2004/05 806 3,274 3,099 25% 26%

2005/06 818 3,548 3,211 23% 25%

2006/07 982 4,382 3,904 22% 25%

2007/08 1,061 4,458 3,985 24% 27%

2008/09 1,172 5,237 4,671 22% 25%

2009/10 1,274 7,477 6,249 17% 20%

2010/11 1,475 9,325 6,752 16% 22%

Source: MoFPED Budget data

4.2.1.2 Suitability of the grant system


The results in 4.2.1.1 above have raised concerns about the appropriateness of the grant

system, as propagated by the Constitution or its management, to address the vertical fiscal

imbalance between the expenditure assignments and local government revenues

sources.As a result, there are calls from a wide range of stakeholders to consider

alternative approaches including sharing national revenues between central and local

governments in defined proportions. This section reviews the opportunities offered by

alternatives to the grant system. Aspects of management of the grant system are

discussed in sections 4.2.1.3, 4.2.2, 4.2.3, and 4.2.5

There are two commonly used mechanisms for addressing vertical fiscal imbalance (a) the

revenue sharing system, and (b) the national expenditure system supported in this case by

the grant system. These are discussed further below.

(a) Sharing national revenues

It is generally agreed that some revenues assignments need to be made to sub-national

governments as part of the fiscal decentralisation architecture. There are however other

options for revenue sharing which may be considered for the purpose of addressing

vertical imbalances. Most common are

(i) Derivation basis: a sharing system where the local governmentsare allowed to keep

a specified share of what is collected within its boundaries. Examples of this are in

China, India, and Russia. In China, VAT is collected at sub-national level and shared

with Central Government. Sub-national government retain 25% with 75% remitted to

Central Government. Enterprise Income Tax is similarly collected by sub-national

levels and shared.

(ii) Sharing a specific tax; a proportion of a given national tax, for example VAT, is

extended to local governments with the distribution among local governments

based on a formula. For example, in the Philippines, 40% of national internal revenue

collections are distributed among local governments on the basis of population,

land area, and equal shares30.

(iii) Sharing pooled national revenues. This method transfers a portion of the national

proceeds to local governments. This is like an unconditional grant. Kenya and

Thailand have adopted this model; In Thailand, the Constitution allocates 20-35% of

national total revenue to local governments. Kenya’s Constitutions requires an

automatic 15% of nationally raised revenue to be distributed to LGs.

Revenue sharing under these schemes, if properly designed, will have significant potential

to address vertical fiscal imbalances between central and local governments. However,

these schemes also carry challenges as outlines in the box below

Sharing Scheme Disadvantages

Derivation basis of

sharing revenues;

requires a high level of transparency in reporting collections to

assure LGs of the right share of the revenues

Central Government may concentrate its collection and

enforcement efforts on the taxes that are either not shared or

shared to a lesser degree31 This is said to be the case in China

and India

30 Implementation Rules For Fiscal Decentralization, Roy Bahl, Jan 1999 31 Intergovernmental fiscal relations in developing countries, by Odd-Helge Fjeldstad, 2001


Sharing Scheme Disadvantages

better endowed regions may benefit from unequal

development and undermine the spirit of unified national

development.

Tax by tax sharing requires a high level of transparency in collections which will

assure LGs of the right share of the revenues

Central Government may concentrate its collection and

enforcement efforts on the taxes that are either not shared or

shared to a lesser degree; more attention paid to those

sources that benefit Central Government

sharing pooled

national revenues

circumvents the problems associated with incentives to

Central Government to focus on selected sources but is said

to be problematic from the viewpoint of macroeconomic

management as discussed below

Sharing pooled national revenues presents variants which offer opportunities to

Government to tailor option to its special circumstances;

(i) Sharing based on total revenues; this method considers national revenues and

donors finances. However, the volatility associated with the donor component

makes it unsuitable for sharing purposes. Poor or unpredictable performance in

donor financing will affect the stability of local government financing

(ii) Sharing all revenues collected nationally; in Uganda’s case, this will cover all

revenues collected by URA. As national revenues have increased, over the recent

years, the Government has channelled more resources to capital investments in

energy and infrastructure in line with the NDP. This option presents a challenge on

determining the appropriate propriety of share of such revenues

(iii) Sharing revenues on assigned to recurrent expenditures. This option excludes

development expenditures. Since the wages are given, it is best to apply the

sharing to non-wage recurrent expenditures. This would imply agreeing to a

proportion of the national non-wage recurrent budget going to LGs as a block

grant. The 2011/12 share of recurrent transfers of the total recurrent budget is 33%.

If Government increased recurrent transfer to cover the financing gap as

estimated in this study (Chapter 8), this share would expand to 55%. So in this case,

a 50% share of recurrent expenditures could be a fair position.

Revenue sharing schemes present other fiscal challenges32 to which attention needs to be

paid. In addition, since sharing mechanisms above introduce a degree of entitlement, LGs

will become assured about financing from the national budget but they are also likely to

become less amenable to external interference - for example, supervision by sectors will

become more challenging. In this case, these methods need to be studied careful to

identify other changes to the legal and institutional framework that will be necessary in

order to achieve a balance for proper supervision of fiscal decentralization and local

service delivery.

(b) Using Grants; Sharing national expenditure

Uganda selected the expenditure sharing strategy based on a grant system. This was in

order to achieve development harmonization through ensuring spending on national

32 Intergovernmental fiscal relations in developing countries, by Odd-Helge Fjeldstad, 2001


priorities. Allocation is based on sharing expenditures using criteria set by sector ministries.

The challenges however, has been with respect to the allocation criteria for development

and recurrent spending since the cost of service which should determine the financing

needs has not been known. Furthermore, the ratio of spending retained at the centre has

been growing overtime (see 4.2.1 above), while on the other-hand, there has been a

mismatch between national revenue growth and the growth of transfers; whereas URA

revenues grew by 22.8% between 2011 and 2012, transfers grew by 11.5%. LGs have been

in a weak position to negotiate the level of transfers. These developments have limited the

growth in grants and widened the mismatch between service requirements and financing

particularly as LRRs have not grown to fill the gap.

Sharing on the basis of national expenditures is appropriate from a point of national policy

implementation and fiscal management. In this case, public finance can be used to

target prioritized expenditures while minimising wastage.

(c) Consultant’s proposal

In view of the challenges under both schemes, Government should debate a suitable way

forward on this critical issue.It is our recommendation that Government considers a hybrid

comprising the following;

- Government introduces a sharing system based on non-wage recurrent expenditure

budget. A proportion of this national non-wage recurrent budget be assigned to local

governments for the purpose of its spending. This amount is then to be allocated all LGs

and non-wage recurrent sector grants

- a system of grants is maintained for developments expenditures. Amounts to this grants

are to be determined sector processes

This report has identified the major gap between the intentions of the Constitution and the

practise with respect to the unconditional grant. Even as Government debates the option

for revenues sharing, it should consider an interim measure to guarantee a higher

proportion of funding under the unconditional grant by earmarking a percentage of the

total budget, excluding loans and grants, for this purpose. A similar approach is practiced

in Kenya where 15% of total revenues is earmarked for LGs as a block (unconditional)

grant to cover the minimum service requirement, as a block grant.

4.2.1.3 Adequacy of legal and institutional mechanisms to protect grants

The lack of real growth in grants also raises concerns about the adequacy of legal and

institutional arrangements to implement the provisions of the Constitution. The following are

key areas of weaknesses or pressures that have affected the ability to protect the growth

in LG grants;

i. The Constitutional definition for the Conditional grant (article 193(3)) is not adequate in

emphasizing growth and the protection of the grant. There is no reference to a need

based allocation of funds; the provision is not required to match allocations to the

costs of services.

ii. The shift in national public expenditure priorities resulting from the implementation of the

NDP has a key role in the lack of growth in the grants. In the recent years, priorities

have been driven largely by the growth of commitments in the NDP with a major


focus on large infrastructure projects and less priority on local service delivery33. Due

to constraints in financing the NDP34, chances to increase levels of grants to local

governments are likely to be limited in the medium term as Government continues to

meet its commitments to these infrastructure projects

iii. Some major decisions related to the local government system are taken without

careful assessment of their implications on local government financing. In recent

years, some of these actions have included the expansion in the number of districts

or lower local governments (sub-counties) and the revision of local revenue sources,

including abolishing graduated tax. Previous studies have shown that these actions

have had an adverse impact on local government financing35 where they are not

accompanied by additional resources to protect existing levels of revenues

iv. Central Government decisions on the size of grants are taken late in the annual

planning process limiting the ability for their growth and protection. Cabinet is the

principal organ for allocating national budgetary resources. The current practice is to

discuss the allocations to LGs grants in the context of MTEF sector ceilings. This takes

place after the Cabinet has agreed to the budget strategy - late in the annual

planning budget cycle. At this stage, it is too late to programme new changes to the

LG financing which may lead to arbitrary cuts in the existing levels. Moreover, the

budget strategy, the key document used by Cabinet for priority setting during the

annual planning process, as well as other budget related policy documents do not

give prominence to local service delivery. Information on local government services

is provided to Cabinet in the context of sector service delivery limiting strategic

assessment of local service delivery on development objectives.

v. Parliament has not sufficiently advocated for the protection of local government

financing.Parliament appropriates budgetary provisions to LGs and approves the

creation of new districts and the revisions to LG revenues sources. Information

provided to Parliament is not always adequate to study the implications of their

decisions on local government financing. Budget information does not always permit

a strategic view and discussion of local government financing or an appreciation of

its impact on service delivery.

vi. There is insufficient reporting on local government service delivery to support policy

discussions.Existing institutional arrangements are either insufficient or have not

provided adequate attention to analytical performance assessments of the impact

of local service delivery on the national development or to inform on policy level

dialogue. The monitoring, guidance and coordination as required by the Local

Government Act section 95 and 98 focuses on ensuring compliance with rules and

less emphasis is given to service delivery quantity, quality and impact. This lack of

institutional support for policy review of local service delivery is limiting its visibility in

the national budget allocation process.

4.2.2 Grant composition and the impact on service delivery

33 For example, at the 2012/13 Budget Conference in March 2012, the list of 7 priorities was mainly oriented to infrastructure, agriculture

and human resource development. Local governments did not receive additional funds. Implication have been no change in funding to

all major grants 3434 Nearly 17% shortfall derived comparing the Medium term fiscal framework, in the National Budget framework paper – 2012/13-2016/17

and the NDP expenditure framework 35Diagnostic of Intergovernmental Fiscal System – Urban Authorities in Uganda, Stefansson & Ssewankambo, June, 2011, Section 3.2


The current organisation of the grant system limits the resources at the discretion of LGs for

management of services including supervision, monitoring and the maintenance of these

services

The Constitution (193) prescribes the organisation of the grant system selecting 3

mechanisms; unconditional, conditional and equalisation, through which financing is

transferred from the national budget to local government;

The UCG was anticipated to constitute the largest proportion of the grants in the transfer

system and that LGs would have discretion to allocate it within their priorities. However,

conditional grants have increasingly dominated the fiscal transfers to local governments

accounting for 89% in 2010/11 (see also chart below). Conditional grants have also

increased in number from 16 to 38 between 2001/02 and 2010/1. The UCG has declined

over the period from 32% to about 10.5% while the equalization grant continues to diminish

accounting for under 0.5% in 2010/1136.

Chart 4.4: Relative share of Grants between 2000/01 and 2010/11

Source: LGFC Database

The chart above shows the relative share of LG grant transfers between 2000/01 and

2010/11. As demonstrated, the conditional grants have grown to be the most dominant

form of transfer.

4.2.1.1. The grant system and financing for local services

The increase in number of conditional grants, specifically the wage related conditional

grants, has crowded out and virtually eliminated prospects for the growth of other grants.

Many conditional grants have remained constant over many years. UPE capitation grant

has remained at Shs.7,000/= per child since 2001. This grant is used to finance instruction

materials, co-curricular activities and school management activities. Somegrants have

become increasingly fragmented and their ability to finance local services has been

eroded over time; Health Centre IIs (HC II) in Pader get an average of 66,000 per month,

HCIIs in 14 districts get below 100,000 per month

36 LGFC database on transfers


In cases where the grants have had to be shared between HLG and LLG or service

delivery units, amounts transferred to LLGs have in some instances have become too small

to have any meaningful impact. This is illustrated in Tables 4.3 and 4.4 where average

monthly allocation under Functional Adult Literacy (FAL) in 2011/12 to sub-counties in

Rubirizi is only Shs.10,427/=, monthly allocations under Community Development Workers

(CDW) grant in Rubirizi and Amuria fall below Shs.5,000, and PHC nonwage monthly

allocation for a health centre II in Bushenyi is only Shs.37,720,

Table 4.3: Sample allocation of selected CDW grants 2011/12

Grant District Population Poverty

index

No of

Sub

counties

Annual

Allocation

(Shs)

HLG

Monthly

allocation

(Shs)

Average

allocation

per sub-

county per

month

(Shs)

FAL Rubirizi 124,500 20.54 11 2,117,565 176,464 10,427

CDW Rubirizi 124,500 20.54 11 530,152 15,562 2,610

Amuria 406,400 46.00 16 1,325,381 38,657 4,487

Bududa 186,400 43.77 16 1,590,457 46,388 5,384

Table 4.4: Example of grant parameters for PHC non-wage

District Population Poverty

index

Annual

District

allocation

HLG

DHO

allocation

No of

Health

Centre II

Average

allocation

per Health

Centre

Bushenyi 200,600 15.12 93,358,086 1,555,968 85 37,720

Kapchorwa 114,000 35.54 48,045,459 800,758 20 72,796

Source: Derived from National Budget 2011/12 and subjected to allocation formula

For grants whose allocation is tied to administrative units, like in the case of FAL and CDW

which are tied to sub counties, the allocations fall further as the number of these units

expand. This is illustrated in the table below for CDW for the years 2011/12 and 2012/13

Table 4.5: Illustration of erosion of allocations for CDW as number of sub counties increases

FY Total Grant

(Shs.)

Number

of

District

Number

of sub

counties

Average

allocation

(retention - 35%)

per district per

month

Average

allocation per

sub-county

(65%) per month

2011/12 400m 111 1,270 105,105 17,060

2012/13 314m 111 1,300 82,508 13,083

Reduction (%) -22% -23%

In the table above, the changes - reductions in size of the grant, and increase in number

of sub-counties, in 2012/13 may see a further drop in monthly allocations of 23% bringing

the monthly allocations to a county in Rubirizi to only Shs.2,010/=. It should be noted that

this financing is expected to cover a set of 9 recurrent activities at the sub-county level

related to office operations (including meeting expenses), mobilisation and field visits.


4.2.2.1 The grant system and Financing of Management Services

The low levels of financing under the unconditional grant and the equalization grant has

led to less discretionary funding (UCG and equalisation grant) for LGs. This, coupled with

the fall in local revenues, has undermined the operational efficiency of LGs; their ability to

supervise service programs and to maintain infrastructure stock is curtailed. It is worth

noting that a significant portion of the unconditional grant (about 60% in 2011/12) is

earmarked for wages reducing further the proportion of the grant over which LGs have

discretion. As seen in the table 4.6 and 4.7 below, LGs tend to spend less on management

functions including planning and internal auditing (less than 1% of total expenditures in the

case of the districts).Internal audit units are under facilitated making it difficult to follow up

with services units in value for money assessments. Councils allocations as well as for the

oversight committees of LGPAC are also meagre; less than 1% of total budget allocations.

Councils are failing to meet regularly to undertake their oversight roles.

Table 4.6: Non-wage recurrent Budgets and Actual expenditure for Districts (000)

Department KIRUHURA KAPCHORWA MOROTO

Budget Actual Budget Actual Budget Actual

Management Services 753,156 285,749 234,159 175,707 1,178,297 1,701,933

Admin. (incl. CAO) 456,099 - 140,943 111,011 815,772 1,583,777

Finance 125,620 258,170 45,356 27,430 126,165 104,074

Planning 142,270 - 47,860 37,266 211,807 8,278

Internal Audit 29,167 27,579 - - 24,554 5,804

Statutory Bodies 205,477 169,372 103,190 85,675 252,031 179,993

Clerk to Council 90,181 75,619 40,540 30,408 86,982 23,402

District Contracts

Committee 52,011 46,346 18,530 17,883 59,160 14,683

LG Public Accounts

Committee 3,624 2,377 5,760 5,679 1,786 4,283

District Service Commission 41,772 29,586 18,860 18,259 16,220 25,285

Standing Committee - - 15,500 12,378 84,420 110,489

District Land Board 17,889 15,444 4,000 1,066 3,463 1,850

Departments 8,871,098 7,619,718 6,639,432 3,200,006 5,088,405 5,846,972

Production 1,748,889 1,703,992 1,688,177 1,565,861 1,654,664 1,399,618

Health 1,317,979 1,282,402 1,651,413 613,071 1,261,222 2,138,387

Education 4,313,897 3,977,910 675,535 428,152 1,113,632 1,216,724

Works 500,919 445,173 1,799,504 254,426 372,355 450,028

Water 708,839 66,086 587,647 291,383 204,087 482,302

Natural Resources 146,830 63,640 47,000 3,087 125,379 7,977

Community Based Services 133,744 80,516 190,156 44,026 357,066 151,936

Total Expenditure 9,829,730 8,074,839 6,976,781 3,461,388 6,518,734 7,728,898

Source: Audited Accounts for 2009/10 for the districts of Kiruhura, Kapchorwa and

Moroto.

The table above shows summaries of non-wage approved budgets and actual

expenditures for three districts of Kiruhura, Kapchorwa and Moroto while the table below

shows the proportional allocations for management services areas.


Table 4.7: Proportion of budget allocations to key management and oversight functions

Department

KIRUHURA KAPCHORWA MOROTO

Budget Actual Budget Actual Budget Actual

Management Services 7.7% 3.5% 3.4% 5.1% 18.1% 22.0%

o/w Planning 1.4% 0.0% 0.7% 1.1% 3.2% 0.1%

o/w Internal Audit 0.3% 0.3% 0.0% 0.0% 0.4% 0.1%

o/w Others 5.9% 3.2% 2.7% 4.0% 14.4% 21.8%

Statutory Bodies 2.1% 2.1% 1.5% 2.5% 3.9% 2.3%

o/w Council costs 0.9% 0.9% 0.6% 0.9% 1.3% 0.3%

o/w LG PAC 0.0% 0.0% 0.1% 0.2% 0.0% 0.1%

o/w Committee incl. DEC 0.0% 0.0% 0.2% 0.4% 1.3% 1.4%

o/w Other bodies 1.1% 1.1% 0.6% 1.1% 1.2% 0.5%

Departments / Sectors 90.2% 94.4% 95.2% 92.4% 78.1% 75.7%

4.2.2.2 Suitability of design of conditional grants

The allocation formulae under conditional grants are also not well suited to addressing the

poverty objectives under the NDP or may even increase marginalisation.

(a) Current allocation formula are largely needs based to satisfy the requirement “to

finance programmes agreed upon between the Government37”. The FDS requires

that the allocation formula for conditional grants should, in addition to targeting

sector objectives, take into account poverty prevalence in the LG. However, as

shown in Table 4,838 below, the correlation between grant allocations and the LG

poverty indicators is generally low (less than 0.5) although there appears to be some

improvement between 2006/07 and 2010/11. This low correlation implies that the

allocation formulae are still insufficient in targeting the more disadvantaged LGs.

Table 4.8: Correlation between allocation under selected grants and population /

poverty factors

Grant

2004/5 2006/07 2010/11

Population Population Poverty Population Poverty

UPE Capitation 0.30 0.31 (0.31) 0.81 (0.10)

Roads Rehabilitation 0.48 0.48 (0.33) 0.47 0.47

PHC - Non-wage 0.66 0.71 (0.33) 0.92 (0.01)

Functional Adult Literacy (0.16) 0.16 0.44 0.63 (0.07)

Community Development

Workers 0.08 0.06 (0.04) 0.32 (0.09)

NAADs 0.27 0.25 (0.05) 0.75 0.00

Rural water and sanitation 0.13 0.20 (0.19) (0.14) (0.17)

LGMSD 0.79 0.84 (0.29) 0.95 0.11

Source: Budget data as provided by MoFPED

37 See explanation of Conditional grant – the Constitution, Article 193 38 Data used in the table is restricted to rural HLGs. It does not include urban LGs


(b) A second factor is that of the fairness of the parameters used in the allocation

formulae. While this study did not carry out an extensive review of the adequacy of

such parameters, LGs identified additional factors to be considered in the

determination of sector grant allocations for selected grants. These are laid out in

the table below. Sectors will need to study these factors.

Table 4.9 Emerging factors in the allocation to LGs

Grant Present allocation

parameters

Additional parameters identified

with LGs

Primary

Education

(UPE)

Enrolment Poverty and Population factors.

No of children with special needs

No of girls in P5-P7

Urban Water

O&M

Tariff subsidy

System specific allocation

Connection subsidy

allocation

Population & urbanization factors

cost of administration and

supervision

PHC Non-

Wage

Population

Infant mortality

Poverty prevalence

Maternity mortality rates

catchment area

cost of delivery per district for

example for island districts

(Kalangala, Namayingo)

Roads

maintenance

(URF)

Districts roads: Population

and area

Community access roads;

population

terrain and environment factors

for example for mountain LGs

NAADS Rural Land Area

Rural Population

Poverty Head Count

population density

Rural Water

and Sanitation

basic minimum allocation

for overheads / operations

per capita cost for

delivery of water and

sanitation services

population at sub-county

safe water coverage at

sub-county

technology of water delivery

systems

terrain

Rural Feeder

roads

land area

population

environmental factors such as

climate

terrain,

Source: Based on survey Analysis 2012

It emerges that gender is becoming a key consideration particularly in social sectors.

Nearly all LGs have asked for a special provision in the UPE grant to cater for the

unique requirements of girls in the classes of P5-P7.

(c) The grants in general do not provide for a reasonable level of operations and

maintenance. Head teachers in all districts raised concern about their inability to

meet the costs of maintaining school infrastructure. While, O&M is eligible for funding

under some of the grants, the limited funding constrains the ability to maintain

infrastructure. In the case of PHC, more funding going towards immunisation and


outreach activities leaves no provisions for the maintenance of the facilities at the

health centre

Table 4.10: Funding to selected services and constraints

Grant Allocation Scope to finance Constraint including O&M

UPE Under 7,000 per

child per annum

35%: instructional /

scholastic materials

35%: co-curricular

activities

10%: school

management (10%),

10%: contingency

No special provision for O&M

Low funding has led to

reducing expenditure on co-

curricular activities and no

allocations in general to

O&M leading to degrading

school infrastructure

PHC HC II in

Nadunget an

average of

66,000 per

month. HCIIs in

14 districts get

below 100,000

per month

administrative expenses

food supply

O&M,

Utilities,

cleaning services,

goods and supplies,

training costs,

payment of interns,

outreaches,

monitoring, supervision

and reporting

O&M in the list of items

eligible for funding. In

practice, due to low funding,

O&M hardly gets allocation

leading to rapid deterioration

of the condition of

infrastructure

4.2.2.3 Equalisation Grant The equalisation grant has remained very small and its impact is not clear. Government

has provided the equalisation grant at about 0.5% of the total grants or less since

1999/200039 (less than Shs.4bn compared with recommended 12bn by the 1999 study on

the introduction of the equalization grant40). The low level of the equalisation grant

financing in comparison to overall transfers may be attributed to non-application of an

appropriate basis for its determination in the absence ofminimum service standards across

all sectors41.

There is a risk that the equalisation grant, in the form it is implemented and amount

provided, may not address the objectives for which it was intended. LGs in the study

generally did not understand the basis for allocating the equalization grant. For example,

Kapchorwa and Namayingo districts could not understand why they had no allocations

for equalization grant and yet Soroti district did have an allocation. Moreover, there is no

process for assessing the degree to which the grant is helping to address the lag behind

the national average. This concern has been raised by the NDP as presented in the

caption below.

Challenges for the Equalization Grant

In spite of the introduction of equalization grants to bring disadvantaged local

governments to the level of service delivery comparable to the rest of the country,

regional imbalances still exist. This is partly demonstrated by disparities in poverty levels

and social development indicators. While nationally, the population below the poverty

line is 31%, the poverty incidence is highest in the Northern region at 66 per cent,

followed by the Eastern at 46.8 per cent, Western at 34.4 per cent, and Central at 27.1

39 The equalization grant was introduced in 1999/2000 40 Introduction of Equalization grant ‘Analysis and Recommendations’ March 1999 41 A number of sectors have now put in place minimum service standards. These include water, education and health


per cent.

Source: NDP, Paragraph 837

A further concern regarding the equalisation grant is clarity in its purpose.The concept of

the “lag” as provided in the Constitutional definition of the equalisation grant is not clear.

In the absence of a menu of eligible expenditures, the equalisation grant is being applied

to address activities that include administration and operational infrastructure, community

mobilisation and social development activities, capacity development, programme

supervision. For example, Soroti District has a provision of Shs99m under the grant for

2011/12 and is applying it to constructing a fence around the District Headquarters.

Moreover, there are three types of grants with elements of duplication which aim to

address the elements contributing to lagging of a LG: (a) sector based development

grants in education, water, health, roads that have targeted investments to address

infrastructure gaps, (b) the non-sectoral development grants (LGDP/LGMSD) that have

over the years provided non-discretionary funding to LGs to support infrastructure

development, non-sector specific activities and even to complement sector investments,

and (c) non-sectoral funding for special cases of marginalisation – the NUSAF, for northern

Uganda, and the Luweero-Rwenzori Development Programme. These additional grants

are targeting aspects of the “lag” within the LGs, their allocations include elements of

poverty and population, they are relatively more focussed and their systems for delivery,

supervision, accounting, reporting and assessment are better developed than the

equalisation grant.

4.2.3 Functions not being performed

Whereas functional responsibilities between central and local government are outlined in

the LGA, overtime, grey areas or areas of overlap or new assignments have emerged that

will require further review

Functional responsibilities between central and local government are outlined in the LGA

(second Schedule). Overtime, grey areas and/or areas of overlap have emerged that

may require further review and deliberation. Field visits with local governments identified

the key areas listed in the table below. Overlap or lack of clarity in a number of mandates

between the centre and local governments has meant that some key service functions

have remained poorly funded or not supervised by LGs. There are also specific areas

which, while clearly part of a decentralized function, have not been devolved to local

government. Tables 4.11 and 4.12 below list some of major grey areas identified in the

study.

Table 4.11: Functional areas of overlap

Function Status

Trade Development Services; conflict in roles with Central Government / unfunded

Social Rehabilitation; role unclear

Secondary Education not fully decentralised

Trade / Technical Education not fully decentralised; and role unclear in relation to

private sector

Land Administration role un clear

Labour and Industrial

Relations

role un clear - unfinanced

Probation And Welfare Conflict with District roles

Source: Study data 2012


Table 4.12: Functions which LGs wish to see decentralized

Function by Sector Reasons for decentralisation

Education

Secondary Education deployment of teachers

School inspections functions is a local government mandate

Secondary - Appointment of Board of

Governors

to improve supervision and vetting

Supervision of secondary education slow / poor response by Central

Government

Vocation Education it is a mandate of Local Governments

Environment and Natural Recourses

Management of forests poor response by Central Government

Lease, land registry and land markets relates to LG mandate and poor

response by CG

Management of central forest Reserves LG can provide better management

Community and Social Services Not fully decentralised

Labour not fully decentralised

Rural training centres To respond better to community needs

Works

Vehicle number plates registration function relates to LG mandate

Road Unit Equipment repairs poor / slow response by regional

workshops

Water

Supervision of Water for growth centres poor response by Central Government

Water for production e.g. valley dams poor response by Central Government

Agriculture

Regulation of inputs poor response by Central Government

Pests and disease control LG already executing it

Health

Maintenance and repair of equipment poor response by Central Government

Health Training for short courses poor response by Central Government

Salaries and personnel emoluments

Pension processing slow response from Central Government

Source: Study Data 2012

4.2.4 Rules for grant mechanisms

The rules governing the grant mechanisms are not clear leading to arbitrary procedures in

their creation and management with adverse impacts on equity and on their effectiveness

to finance services

Foremost, transfers to the first batch of districts in 1993/94 were drawn arbitrary; from

provisions for activities of line ministries whose services were decentralized, without proper

costing. The size of the un-conditional grant in 1996/97 was based on affordability within

the ceiling imposed by the MTEF. Subsequent changes to the size of the grants have been

incremental with no real revisions to address costs of services. Secondly, no single set of


rules or criterion was developed when new grants were created. This is illustrated in a

survey of 19 grants that were created between 2001/02 and 2010/11 – see box below.

Box 4.1: Rules in creating grants in practice

Qn.1: What was the motivation of creating the grant?

Qn.2: Why was it necessary to use a separate grant?

Qn3. How was the grant created?


Qn.4: How was the ceiling to the grant determined?

Source: Local Government field surveys. 19 were grants created between 2001/2

and2011/12 in the sectors of education, community services and administration were

involved in this survey

The survey points to an adhoc process for creating new grants and one which may not be

properly regulated. The origination of a grant can be from any source, LG, sector, MoFPED

or even Cabinet. The motivation for its creation also varies perhaps depending on the

source of the grant. Ceilings are in some cases based on the cost of services, particularly in

the case of salary grants, on levels determined by MoFPED or even on the basis of

directives from Cabinet. The gap between the level of financing and the cost of service is

often aggravated by the weak negotiations during grant formulation which focusses on

the purpose and modality without covering the size of the grant. LGs’ participation in

these negotiations is often limited.

The absence of formal rules for creating new grants is a factor limiting their effectiveness

during implementation. The limited participation of LGs in the process of formulating grants

undermines their ownership and efforts to increase local autonomy. The practice

described above has also not been effective in determining optimal levels of financing for

the services for which the grants are intended. For example, in the case of CDW grant

(also refer to table 4.2), sub-counties in 80 of 111 district receive less than Shs.20,000 per

month

4.2.5 New practices in the decentralization architecture

There are significant levels of financing from the national budget for local government

services but which do not flow through the grant system Table 4.13 below provides a list of

these expenditures under the 2011/12 budget.


Table 4.13: Expenditures under 2011/12 budget (figures in UGX billions)

SECTOR/VOTE

Non-

Wage GoU

Donor Total

WATER AND ENVIRONMENT

- Rural water and sanitation - Support to RWS project 0.64 - - 9.01

- Urban Water supply and Sanitation - 090280

1.04 4.09 5.14

- Water and Sanitation Development - North (1074)

1.48 10.40 11.89

- Water and Sanitation Development - East (1075)

1.40 5.05 6.45

- Water and Sanitation Development - Central (1130)

4.96 0.83 5.79

- Kampala Sanitation Program - protection of L Victoria

0.10 32.53 32.63

- Support to small town WSP 0164 090280

0.64 0.21 0.85

SUB-TOTAL Water 0.64 9.63 53.12 71.76

EDUCATION

- Development of Sec Education: Project 0897

6.50 0.77 7.27

- Post Primary Education: ADBIII Project 0949

1.06 8.71 9.77

- Support to USE (IDA) - 1091

0.75 91.20 91.95

- Support to USE (ADB IV) - 1092

5.57 33.45 39.02

- Operational Support to Govt. Technical Colleges 33.99

33.99

- Development of BTVET (0942)

3.24 2.01 5.25

SUB-TOTAL - Education 33.99 17.12 136.14 187.25

ACCOUNTABILITY

Ministry of Finance

Sub-county Development Grant/Strategic Interventions 4.60 7.72 12.32

SUB- TOTAL ACCOUNTABILITY 4.60 7.72 12.32

GRAND TOTAL 39.23 34.46 189.25 271.33

Source: Compiled from National Budget 2011/12

If these funds were to be included in the transfers to local governments through the grant

system, the sector shares for local governments would increase significantly, for instance, in

education, the share would move from 67% to 82% using 2010/11 figures. The share under

health would increase from 36% to 58%.The bulk of these are development programs

financed in part by external development assistance. Their design is often a reflection of

agreementsreached with respective development partners. Additional issues relating to

this type of financing are enumerated here below;

Financing outside the formal grant system is often not subject to the rules of allocation,

transfers and reporting in conformity with the decentralization framework. Thisis likely

to violate the cardinal decentralisation principles of equity and transparency in

horizontal distribution of resources across local governments.

Local accountability for service delivery under these programmes is generally

weak.Major accountabilities for these programs tend to remain with the Central

Government. Central Government units impose greater control over the design,

supervision and reporting creating a situation of increased accountability to the

centre. For instance, more emphasis is given to reporting to the Ministry of Education

on USE construction activities under the ADB funded project. This is weakening the

local accountability and sustainability of these projects.


Provisions to local governments are not captured in their budgets. Additionally,

disbursement channels used are different from those relating to other grants. As a

result, these funds are not always captured in LG audits and not subject to oversight

by LG Councils; and

Most of these modes of financing are project based. Where specific project

implementation units are used, these introduce overheads which reduce the size of

the provision available to service units (Table 4.14 below).

Table 4.14: Analysis of Central Government spending and Transfers to LGs (figures in

UGX-billions)

Project / program run at Central

Government

2011/12

Budget

(incl.

donor)

Spending

at Central

Govt.

Transfers to

LGs or other

service

units

%

overhead

Education - Support to USE (IDA) 103.7 18.0 85.7 17%

Education - Support to USE (ADB IV) 39.0 2.8 36.2 7%

Water and Sanitation Development

facility - North 12.8 0.9 11.9 7%

Source:National Budget Framework Paper 2011/12

4.3 Proposal on review of grant system

This is a proposal to review the current grant system limiting the number of grants while

increasing the level of flexibility. It is a variant of the FDS proposal on reducing conditional

grants. Recent developments in payment practices and systems (direct transfers) improve

the chances to implement some of the recommendations related to collapsing grants

under the FDS. Direct transfer methods are able to guarantee the delivery of funds to the

final destinations. Local governments’ control function is not lost since they verify and

advise MoFPED on all payments. Table 4.15 below shows possible changes in the structure

of the grants.

Table 4.15: Proposed changes in Grant structure by Sector Sector Current CG distribution

2011/12

Proposed new structure

Total

grants

Wage

grants

Non-

wage

grant

Devt No of

grants

No of

line

items

Grants and line item Implications (budget lines)

Wage Non-

wage

Devt

Health 6 1 4 1 1 4 1 2 1 PHC Salaries

PHC Non-Wage

Transfer to other units (District & NGO

Hospitals)

PHC Development

Education 7 3 3 1 1 5 1 3 1 Education salaries

Primary Capitation

Secondary Capitation

Health Training

Education development

Agriculture 3 1 1 1 1 2 1 1 Production and marketing

Production – development

Drop wage


Sector Current CG distribution

2011/12

Proposed new structure

Total

grants

Wage

grants

Non-

wage

grant

Devt No of

grants

No of

line

items

Grants and line item Implications (budget lines)

Water /

Natural

resources

4 3 1 1 3 2 1 Rural water

Urban water

Water development

Drop wage

Works 2 1 1 1 2 1 1 Road maintenance (URF)

Roads rehabilitation / construction

Community

Services

6 1 5 1 3 3 FAL

Special groups; Women, youth, PWD

Public libraries

Non-sectoral 1 1 1 1 1 LGMSD

General /

Administratio

n / statutory

9 4 5 Move all to UCG

TOTAL 38 10 22 6 7* 20* 2 14 6

NB: *Conditional grants could be 7, if sector alignment is accepted or 20 if the definition is

maintained at budget line level

Source: Compiled from 2010/11 national budget as provided by MoFPED

Basic principles to guide this proposal:

Conditional grants are to stay and to the extent possible, be restricted to front line priority

programme areas (PPA); education, health, agriculture, water, roads, environment

which are consistent with national policies and programs and with key target areas;

All functions under management services should be financed using unconditional grants

or local revenues. This implies conditional grants under statutory / administration

including IFMIS, DSC operational costs, PAF Monitoring & Accountability, Start Up

Costs, DSC Operational Cost, Boards and Commissions and School Inspection

should be moved to the non-wage component of unconditional grants. Similarly,

DSC Chairperson salary, CAO/Town Clerk's salary, Salary and Gratuity for LG elected

leaders, LLGs Ex-Gratia are to be classified under the wage component of the

conditional grant;

LGs are to demonstrate that they are making the necessary allocations to management

services. Without making the unconditional grant conditional, LGs should be required

to provide ex-post reporting on the implementation of key managements services

against a set of indicators, for example to demonstrate that the Councils are

meeting, inspection visits under education are taking place, and value for money

review are conducted by internal audit. Performance on these agreed parameters

should form prior conditions for releasing sector grants;

All salary related grants, except where they relate to service centres such as schools,

health centres, with distinct management outside the central LG structure, should be

integrated into the un-conditional wage grant. In this regard, conditional grants for

agriculture extension and community development works should be abolished and

integrated into the UCG-wage. The recent developments in systems such as straight

through processing (STP) introduce sufficient control and assurance that salaries will

reach recipients;

Salary payments under education and health, or for that matter, all sectors with distinct

service delivery units, should be clustered under a single expenditure line. Thus,

separate lines (grants) for primary, secondary or tertiary education are replaced with

one salary line “Education Salaries”. Again, there should be no concern regarding

mixed payments because of controls associated with direct transfer mechanism. An


analysis of payments under each primary, secondary or tertiary should still be done

from the payrolls;

All activities related to planning, supervision, monitoring, and auditing should be funded

from an unconditional grant (non-wage component). Again, as indicated earlier,

the use of ex-post conditions e.g. existence of internal audit reports, and delivering

health/ education inspection reports as per schedule. This also means expanding the

unconditional grant; and

Allocation formulae for conditional grants should be based on budget lines and controls

maintained at the same level. Again, as systems have changed, these have

become easier to manage; the secondary education grant is already disbursed

directly to schools, soon primary schools will follow. This is also likely to be picked up

under the health sector. The widening of the IFMIS is also likely to strengthen control

as, for example, LGs will receive releases along budget lines electronically, and vote

holders can then be able to view receipts due to them much faster than before

making service delivery quicker. The robust IFMIS has built in accountability and

monitoring functionality that enables the closing of outflow gaps.

4.4 Key recommendations

This section deals with recommendations derived from the above findings. They are

grouped into short term and long term

Ker recommendation on vertical sharing of revenues

The Government, through MoFPED, should undertake a study to consider alternative

vertical sharing options other than the grant systems and the opportunities they offer

to addressing vertical imbalances in financing for local governments

The outcome of this recommendation is critical for the proposed recommendations

presented below. If the Government determines that the grant system should stay, the

recommendations below should be implemented in full. Since a review of the vertical

sharing mechanisms may not happen in the short term, the Government should proceed

to implement the recommendations below provisionally.

a) Fiscal transfers

Strengthen institutional and legal mechanisms to protect and improve advocacy for

grant financing levels; allow greater discussions of local service delivery in Cabinet

by (i) including prominent sections in the budget strategy and other national budget

policy documents, (ii) giving more priority to allocation to local governments, and (iii)

protecting financing to local governments ensuring its growth in real term in line with

population and price changes.

The law (Public Finance Act replacing the Budget Act) should also be amended to

require the MoFPED to provide a separate medium term financing plan for local

government service delivery along with the national medium term expenditure plan

and to submit them to Parliament on 1st April42 . Parliament will be able to monitor

the implementation of provisions of the law related to fiscal decentralisation and to

ensure the growth in grants as required in the law. These changes should be led by

MoFPED in close collaboration with MoLG and LGFC.

42 Budget Act (2001) – section 4(1)


Review the budget calendar to focus attention on local service delivery earlier in the

national budget planning process. This should also include a review of the MTFF to

include specific targets for financing local governments over the medium term and

to require Cabinet to make aggregate allocations to LG services. This process will be

led by MoFPED.

Review the structure of key policy budget documents to include a section to inform

policy decisions on the state, performance and financing of local service delivery.

This action will led by MoFPED working closely with LGFC.

All financing for functions assigned to LGs services from Central Government should

be transferred through the grant system and use established grant rules focusing on

increasing the levels of transparency and equity. In this regard, the rules and

operations of the grant system should be embedded in the aid management

procedures, and the development partners should be made aware of them at the

time of negotiating external assistance that is intended to support decentralized

services.

Develop an analytical function to monitor local service delivery, draft inputs to the

budget strategy and a special local service delivery and financing performance

report. The function will be placed within the LGFC but will work closely with MoFPED

(EDP&R, MEPD and BMAU). LGFC will initiate the development of this function

working closely with MoPS and MoFPED. It will imply reviewing the structure of the

LGFC to provide for the function and the recruitment of appropriate staff, and the

financing for this new function. MoFPED will review its budget calendar and provide

guidance and formats for the input to be provided by this analytical function into

the budget process.

The Minister of Local Government, in consultation with Minister of Finance and

Minister for Public Services, by statutory instrument43, should establish regulations to

guide the process for creating new local governments and reviewing the local

revenue structure in a form that will preserve and promote the effectiveness of

financing of the local government system. The regulations should clarify the criteria

and institutional roles for changes in the form of local governments’ structure and

revenues;

Enhance the role and profile of the LGFC, in the regulations, to review and advise

the President as well as Cabinet on the implications of policies and decisions that

impact local government financing. This should cover policies and actions related to

revenue and expenditure assignments, changes to the Central Government grant

system, changes to the structures of the local government, etc. This role will be

clarified in the statutory instruments of the Minister of Local Government.

b) Vertical sharing

Sectors should review functions to clarify detailed assignments of mandates

between central and local government to eliminate “grey” (unfunded/overlaps)

areas that have emerged over time. Cases in point are situations of refugees and

other security threats including cattle rustling and other incursions. The MoLG should

lead this process establishing a calendar of activities for the sectors. The Ministry

43 Based on authority granted under Section 175 of the LGA


should work closely with MoPS while undertaking this. The Ministry should also

coordinate this review process with the on-going study on the implementation of the

regional tier and the planned study on local government structures. The clarification

of grey areas will have financial implications for local governments. The MoLG, in

close collaboration with LGFC should determine the financing implications and

reach agreement on the modalities for implementing them with the MoFPED.

Review the sharing of personnel responsibilities between CG and LGs to improve the

attraction and retention across LGs. Consideration may be given to reviewing the

sharing of responsibilities for HR management for professional / management staff in

a service delivery unit that may be located under separate management – in this

case secondary schools and health centres. MoLG should coordinate this activity

working closely with MoPS, sector ministries and local governments. The review

should also be coordinated with the exercise on the implementation of the regional

tier and the proposed exercise to review local government structures.

c) Grant system – design and flexibility

Reform the grant system; pursue FDS recommendations to reduce the number of

grants and evolve the system in a manner that will strengthen the partnership

between LGs and the centre by ensuring consistency, autonomy, predictability and

adequacy to meet the minimum cost of services. Reduction in the number of grants

will include rationalizing salary grants and requiring the functions of inspection,

supervision, monitoring and reporting, and all roles of central administration, to be

financed out of LG central budget. This also implies reviewing the level of UCG to

meet these mandates. LGFC, through the Minister for Local Government, will lead

the reforms to the grant system. This will involve coordinating with MoFPED, sector

ministries and with local governments. An initial proposal on the size of the un-

conditional grant that will be required in the reformed system of grants is provided in

Chapter 8.

Increase UCG to provide more flexibility to finance unfunded mandates and institute

a process to monitor the allocations to key mandates without compromising the un-

conditionality of the UCG. The LGFC should coordinate the development of ex-post

conditions and a performance framework to be used to monitor the implementation

of mandates of local governments funded under the grant. The performance

framework will provide conditions (prior conditions) that will trigger the disbursements

of the sector conditional grants. The LGFC, working with MoFPED, should institute

procedures for the performance assessments and integrate them into the rules for

quarterly releases taking care not to cause further delays in the release system. In this

regard, MoFPED (LGROC) will revise the release guidelines to integrate these new

rules.

Review the rules and criteria of the conditional grants to focus conditions on outputs

rather than inputs and to increase the flexibility of LGs in allocating to priority needs

within each sector.

Evolve the equalisation grants to tie eligibility to low revenue potential and the

existence of unique conditions which constrain delivering services within a LG, for

example, difficulties in operations associated with island LGs or unique terrain in high

altitude or mountain LGs. A study will be necessary to expand the criteria, identify


those LGs that fall below the threshold of the revenue potential and those with hard

to operate conditions of service delivery identified above.

Amend the LGA to require conditional and equalisation grants to grow based on the

formula laid out for the unconditional grant in the Constitution (Seventh Schedule).

Implement these growth provisions on annual basis.

d) Grant system – formulation and operational rules

Design and institute a set of rules to guide the formulation of new grants. The rules will

require that grants are sufficiently funded to meet a basic level of service delivery

and to ensure growth in real terms over time. These rules will form part of the revised

FDA. Drawing up the rules will be led by LGFC closely collaborating with MoFPED,

sector ministries and local governments in the context of the LGBC. Once the rules

are established, LGFC will lead their implementation in the context of the revised

FDA.

Review the grant system to increase the sensitivity of the allocation formulae to

poverty and population factors and to provide adequately for O&M for services with

physical infrastructure implication. LGFC will coordinate with sectors to continuously

review grant allocation formulae to increase their sensitivity to poverty and

population factors. To the extent possible, O&M costs should also be budgeted

under the UCG but sectors may provide cost provisions within the grants where new

investments are made for a period not exceeding 3 years. These O&M costs should

then be transferred to the UCG. The service delivery monitoring function in LGFC

should monitor the allocations and disbursements for O&M for each local

government.

Institute rules to require all financing for LG functions to be implemented within the

grant system in a form to ensure transparent and equitable distribution. The

implication is that current projects and other sector disbursements made directly to

local governments should be integrated into the formal grant system. MoFPED is to

coordinate with LGFC and sectors to develop these rules. The rules will have

implications for donor relations for example in negotiations of external assistance.

MoFPED, under the Partnership Policy, will issue guidelines to DPs on the rules

governing external flows to local governments taking account of the requirements of

the grant system.

.

e) Grant system – operational practices

Extend the system of direct transfers to primary schools and health centres to

improve efficiency in disbursements for service delivery. The process should be led by

MoFPED in collaboration with MoES.

The transfer of funds to local governments should be responsive to the bottom up

planning process, so that any transfer is targeted to the achievement of specific

work plan outputs and outcomes, an output funding system.


5 ANNUAL PLANNING AND BUDGETING CYCLE

5.1 Introduction and background

Local Government (LG) Planning and Budgeting process is central to Uganda’s fiscal

decentralization policy implementation. The LG Act (CAP 243) section 77 (1) provides LGs

with the rights and obligations to formulate, approve and execute their budgets and

plans. The LG annual planning and budgeting process ensures that local needs and

priorities feed into the national plans and budget in a bid to localize implementation of

government programs. To strengthen this process, the FDS harmonized the LG and CG

planning and budgeting cycles to facilitate the integration of local government

development targets into the national process while strengthening dialogue on LG issues

at the national level. This harmonization has also facilitated the transfer of grants from the

national budget to local governments. This way, decentralized planning and budgeting

remains critical to the rationalization of LG financing.

This Chapter reviews the LG annual planning and budgeting cycle and the national

budget process to the extent that value is added by their harmonization. This review

examines gaps in the process that may need to be addressed to improve effectiveness in

local government financing for the enhancement of services delivery. The review assesses

the continued relevance of the key components of the planning and budgeting cycle.

Finally, the chapter ends with short and medium term recommendations on how to

improve the cycle and the alignment of the national and local government annual

planning and budgeting process to improve local service delivery.

5.1.1 Harmonization the central and local government planning and budgeting cycle Entrenched in the 1995 Constitution (Article 176 (2e), Uganda’s decentralisation policy has

guided the establishment of44 LGs with autonomy to initiate, plan and execute policies

affecting the people within their jurisdiction. Accordingly, LGs are responsible for their

planning and budgeting process45. Over the years, Central Government has provided

guidelines to higher and Lower Local Governments to guide their planning and budgeting

activities. Various other legal provisions support the local government planning and

budgeting process including its linkage with the national process. Section 35 of the LGA

(Cap243) expounds on the LG function for planning and its link with the national planning

process. Section 77 of the LGA (Cap243) explains the budgetary powers of local councils

and the link between the budget and the national priorities. This integration is also

supported by the Budget Act (2001) and supplemented by the Local Governments

Financial and Accounting Regulations (2007) along with its supporting manual.

The Budget Act (2001), sets the pace for the national budget cycle specifying the key

dates in the national budget calendar. The FDS (2002)46 required harmonization of the LG

planning and budgeting cycle so that the LG budgeting process “provides feedback and

impacts upon the National budget”.

The harmonization of the LG and Central Government (CG) planning and budgeting

processes was done primarily to serve two key reasons:

44 The Constitution, article 176 45 Sections 35 and 77 of the LGA(Cap 243)

Chapter 4 of the Fiscal Decentralisation Paper, May 2002 page 25


a) to link resource allocations strategically with national priorities through the Medium

Term Expenditure Framework (MTEF); and

b) to reform the general apparatus of public expenditure with the aim of ensuring

efficient and effective use of public resources through increased transparency and

accountability between the centre and LGs.

This harmonization was to further strengthen the alignment of both processes with the

Budget Act. Another crucial objective of the harmonization was to strengthen the

integration of planning and budgeting processes. This was supposed to enable updating

of the DDP and its linkage with the LGBFP. To facilitate this harmonization, the FDS

established the LG Budget Committee (LGBC)to coordinate the key actors relating to the

LG annual planning and budgeting processes within Central Government and with local

governments and to promote dialogue on local government budget issues at the national

level.

5.1.2 Progress on the Implementation of FDS The MoLG working with LGFC provided LG with technical and easy-to-use guidelines on

how to conduct the planning and budgeting processes at all levels47. In addition to this

various activities have been implemented since the adoption of the FDS:

a) The budgeting process was revised in accordance with FDS principles of LG

autonomy and participation.

b) Guidelines for planning and budgeting for HLGs were prepared and disseminated.

c) Other guidelines have covered participatory planning, district development

planning, and FDS budget formulation guidelines.

d) The link between the DDP and LGBFP was firmly established.

e) The LGBC regularly identifies issues from LGBFPs which are included in the national

BFP.

f) The harmonization of the LG and CG budget planning and budget cycles has been

further elaborated upon by the Local Governments Financial and Accounting

Manual (revised 2007).

g) The budget was considerably reformed to become more result oriented particularly

through the introduction of output oriented budgeting and the use of Performance

Form B in 2009/10.

A key improvement brought by this harmonization is the increased engagement that LGs

now have with the Central Government through regional and national budget

conferences.

The harmonization of the LG and CG budget cycle has supported the realization of

smoother intergovernmental fiscal relations.

Since 2002 when FDS came into force there has been increased transfer of resources to

LGs albeit with challenges of insufficiency.

Another positive result is the participation of LGs in a process of negotiations with the

Central Government that provides LGs a further platform for interaction with a

purpose of strengthening systems for more effective ways of implementing programs

using conditional grants.

The harmonization of the two cycles has organized and increased responsiveness

between central and local government – with event timelines.

47These participatory planning and budgeting manuals have been essential in providing clarity on how to conduct activities further aided

by translation of these guidebooks into the local languages.


There is in place an annual comprehensive national districts performance assessment

with rewards and sanctions based on performance results which has generated peer

competition and focus on areas for improvement.

5.2 Findings relating to the Local Government Planning and Budgeting process

Efforts to integrate the annual planning and budgeting processes at the national and local

government levels still face challenges. These include the following:

a) Communication and feedback to local governments

b) Funding for the planning and budgeting process

c) Timelines in issuing indicative planning figures and budget guidelines.

5.2.1 Communication and Feedback to LGs by Central Government

Whereas consultations, workshops and conferences are required to follow the bottom-up

planning and budgeting approach there is a general feeling by LGs that their input at the

various planning and budgeting fora do not find their way into the national budget

framework. Some of the LGs visited felt that consultations with sectors on service

programmes are not effective. On the other hand, sectors say they carry out several

reviews and consultations as part of the process of formulation of the Sector Budget

Framework Papers. The sectors admit that the consultations are made with a sample of

LGs given shortfalls in logistics and financial resources to adequately undertake this

process.

The dissatisfaction of LGs in the planning and budgeting processes is mostly a result of

inadequate communication and provision of feedback by the Central Government MDAs.

Most of the LGs officials interviewed during the field visits said they were not clear about

the changes to their planning and budgeting activities as a result of the new framework

under NDP. Furthermore, when LGs submissions are not included in the final national

budget this is interpreted by LGs as rejection of their inputs whereas in reality the national

budget is a result of consultations with various stakeholders on their priorities.

5.2.2 Funding to the Planning and Budgeting Process

The current bottom-up annual planning and budgeting framework enables participation

of LLGs in a manner that allows their local service delivery needs to be reflected in the

District Development Plans. Linking the LG and CG planning cycles is intended to make

the government more responsive to local needs by strengthening the linkage between LG

and Sector plans. The five-year plan presents an opportunity to LGs to keep a medium

term development focus while refreshing the annual plans with new priorities from LLGs

and changes in national priorities.

However, LGs are experiencing difficulties in financing this participatory planning and

budgeting process. The annual LG planning and budgeting process is mainly financed by

local revenues. Over the last decade, local revenues have continued to decline posing a

challenge to this process. The Local Government Act (Cap 243) requires HLGs to share

revenues with LLGs where the latter retains 65% of revenue to facilitate among others the

planning and budget process. All LGs visited during the study reported that due to

inadequate local revenues, LLGs have not been able to submit their development

priorities to be consolidated in the district or municipality development plans in a manner

that is as comprehensive as would be desired. This state of poor planning has been


identified by the MoFPED48 as “a significant bottleneck” responsible for low absorption of

grant financing in local governments. A study49 conducted by LGFC in 2009 to assess the

HLGs and LLGs financial capacity to implement a participatory budgeting system

disclosed a 22% gap (see Table 5.1 below) in financing of the budgeting and planning

process as elaborated by the table below:

Table 5.1 Gaps in Financing of a year’s Planning and Budget Process in a Typical District

Planning and Budget Process Costs in UGX for

a typical LG in a

FY

%

funded

by LG

Funding Gap

(%)

Community Consultation 3,967,583 56% 44%

Compile LLG Development activities into

DDP 5,177,025 94% 6%

Examination of draft Budget Framework 3,308,167 83% 17%

Holding of National Budget Conference 2,585,833 67% 33%

Regional Local Government Budget

Framework Paper workshops 2,868,813 88% 12%

Set inter-sectoral priorities and fix inter-

sectoral allocation 3,588,375 90% 10%

Prepare and circulate budget call

circulars 1,576,458 59% 41%

Identify LLGs investments and prepare

development budgets 1,833,333 60% 40%

Compile LLG development activities into

DDP 5,177,025 90% 10%

Review development plans 857,917 64% 36%

Examination of draft framework paper 3,308,167 94% 6%

Holding of Budget conference 4,840,417 80% 20%

Incorporate input from Budget Framework

Paper 674,167 76% 24%

Approval of Budget Framework Paper

and draft budget 3,986,250 86% 14%

Overall monitoring 4,000,000 80% 20%

Total 67,750,030 78% 22%

Source: LGFC Study December 2009

As can be seen from Table 5.1, financing of activities during community consultations

exhibits the highest financing gap of (44%) followed by the related stage of preparing and

circulating budget calls as well as the process of identification of investments and

preparation of development budgets at LLGs. While it is understood that LG revenue is

limited, it was suggested by LGs that an allocation under PAF monitoring non-wage be

provided to ease the financing gaps in this process.

5.2.3 Timeliness in issuing Indicative Planning Figures Indicative planning figures (IPF) are used by the Central Government to inform LGs about

the level of budget provisions for grants that are planned for a given year. These figures

48 Absorptive Capacity constraints, the causes and implications for budget execution, MoFPED, 2011 (Section 4.2)

49 The study was titled: Assessment of HLGs and LLGs financial capacity and participatory budgeting systems by DCI Consulting

firm in 2009


are to be provided to LGs, along with budget guidelines, early in the budget cycle to

facilitate their budget formulation process. IPFs for individual LGs are determined by MDAs

following sector ceilings issued to them by MoFPED. Issuing the IPFs is the responsibility of

MoFPED. About 35% of respondents (See chart below) in the survey identified the delay in

issuing final IPFs as a major constraint to their planning and budgeting formulation process.

Fig 5.1: Factors that LGs felt are constrains the planning and budgeting process

Budget Call Circulars were issued to LGs 3 times in the course of preparing the FY 2012/13

budget; i.e. in November 2011, April 2012, and May 2012. The first two issues required LGs to

use provisions for FY 2011/12 for IPFs while the third issue included new IPFs. A final set of IPFs

was issued in June following presentation of the Budget to Parliament. The table below

examines changes in levels of IPFs for 5 of the districts visited in the study. For each district,

changes in IPFs are examined for 5 grants; unconditional, UPE capitation, PHC non-wage,

rural water and sanitation and Community Development workers grant (CDW).

Table 5.2: Percentage Change in FY 2012/13 Issued for some grants in selected districts

Soroti Arua Kisoro Namayingo Wakiso

1st to

2nd

IPF

2nd to

3rd IPF

1st to

2nd

IPF

2nd to

3rd IPF

1st to

2nd

IPF

2nd to

3rd IPF

1st to

2nd

IPF

2nd to

3rd IPF

1st to

2nd

IPF

2nd to

3rd IPF

Total - All

grants 19% 7% 4% 5% 8% 17% 7% 6% 9% 2%

UCG - Non-

wage 8% -12% -1% -1% 0% -1% -6% 0% -1% 4%

UPE Capitation 3% 0% -2% 0% -1% 0% 11% 0% 1% 0%

PHC non-wage 0% 0% 35% 0% 0% 0% 0% 0% 0% 0%

Rural Water 102% 9% 19% 9% 0% 16% 0% 17% 0% 17%

CDW 36% 3% 58% -16% 23% 3% 26% 3% 54% -13%

Source: Field Survey – primary information

MOFPED should issue the MTEF in time to enable MDAs provide the IPFs to ensure that LGs

receive them in time to facilitate their planning and budgeting formulation processes.

Uncertainty in IPFs encumbers LGs in their decisions as they prepare their budgets. The

table above reflects that there were always changes in the levels of IPF from one issue to

another. However, these changes have been generally small, except for Water and CDW

grants. IPFs for PHC and UPE, some of the key service grants, have remained largely stable.

The changes have also generally reflected increments rather than reductions. In this


regard, changes introduced by IPFs may not be significantly disruptive to the LG budget

process.

5.3 Central and LG Planning and Budgeting cycle under FDS (2002)

In a bid to implement a core tenet of FDS, GoU harmonized its planning and budgeting

cycle with that of LGs to achieve the following two major aims: realistic budgeting through

an integrated 3-year budgeting system; and focusing on the intended results of

expenditures i.e. setting objectives and targets for measuring budget performance.

The FDS elaborated three tools in the budgeting process: The District/Urban LG

development plan (DDP); The Local Government Budget Framework Paper (BFP) and the

budget with an annual work plan (AWP). The planning and budgeting cycle for LGs

involves broadly a 3-stage process: preparation for the budget process; preparation of the

Local Government Budget Framework Paper and finalization and approval of the Annual

Work-plans and Budget. To satisfy these three stages, a series of activities take place in a

step by step and self-reinforcing sequence that was linked to the national process in a

manner that made holistic the national planning and budgeting cycle. At the inception of

the FDS the following were the main stages of the harmonized central and LG planning

and budgeting cycle.

STAGE 1 PREPARATION OF THE BUDGET PROCESS

Step 1: Meeting of the Local Government Budget Committee (September)

Step 2: Holding of the National Budget Conference (October)

Step 3: Holding of Regional Local Government Budget Framework Paper Workshops

(October)

Step 4: Issuing of Local Government Budget Call Circular (Early November)

STAGE 2 PREPARATION OF THE LG BFPS

Step 5: Preparing Sector and LLG inputs for Development Plans (Early November)

Step 6: Sector Departments prepare input for LGBFP (November)

Step 7: Sector Committees review sector input to the BFP and Development Plan

(November)

Step 8: Compilation of draft Budget Framework Paper and a TPC reviews them (Early

December)

Step 9 EC & C/persons of Sector Committees and HoDs review the draft BFP and DDP

(December)

Step 10: Holding of Budget Conference (December)

Step 11: Finalization of the BFP and submission to MoFPED (January to May)

STAGE 3 APPROVAL OF THE BUDGET AND ANNUAL WORKPLANS

Step 12: MoFPED reviews LGBFPs and drafts budgets and set final budget ceilings (January

to May)

Step 13: Budget Desk revises BFPs and draft budget (May)

Step 14: Sector committees review final draft annual work-plan and budget (Beginning

June)

Step 15: Reading and approval of budget by Council (Before 15th June)

The following chart presents a diagrammatic flow chart of these stages and they followed

on another:

Page 52 of 150 Final Draft Report

Fig 5.2 Original Steps of the harmonized central and LG annual Planning and Budget cycle under FDS (2002)

Page 53 of 150 FinalDraft Report

5.4 Review of implementation of the Annual Planning and Budgeting Cycle

The ToRs required the consultant to review the continued relevancy of the components of

current budget cycle with a view to proposing amendments or improvements to address

the emerging challenges.Through consultations with stakeholders including local

governments, most of the respondents in LGs that were visited, especially District Planners,

CAOs and Sub-County Chiefs agreed that the cycle is quite sufficient and does not need

substantial alternation. The gist of this cycle is for LG to harmonise their planning and

budgeting processes with those of the Central Government making the latter more

responsive to LGs fiscal aspirations- which is a fundamental aspect of fiscal

decentralization. As was pointed out in Chapter 3, this is an area under FDS that

performed relatively well over the last 10 years. But through the study’s consultative

process, proposals for improvement were made to further strengthen the cycle as below:

a) LGs will now develop and follow a 5 year plan in consonance with the National

Development Plan as opposed to a three-year rolling plan but nonetheless operative

with the MTEF modalities. The National Planning Authority should develop and

disseminate guidelines to guide LGs to this effect;

b) A new stage in the cycle is proposed to be added to allow Local Government

Finance Commission to effectively provide input to the budget process in

accordance with its mandate as stipulated under Article 194 (4a) of the Constitution

of the Republic of Uganda.

c) Overall it was important that actual calendar dates are emphasized in the cycle

and all LGs strictly adhere to the dates. This aspect would instil compliance and

reduce late performance on stage milestones across all LGs. In light of this the

following stage dates are proposed:

i. This review proposes that consultations with LLGs starts in August to allow

more time or a more comprehensive engagement of the citizenry in villages;

parishes, wards and cells.

ii. By August 30th LGs should have received guidelines on the budget process

from LGBC

iii. Holding Conditional Grant negotiations much earlier in the process by the

middle of September;

iv. Regional Workshops shall be held in all regions by September 30th

v. Issuing of LG Budget Call Circular to all heads of department and LLGs will be

done by 10th October;

vi. Holding of the District Budget Conference must have taken place by

November 30th

vii. All CAOs must have submitted Drafted BFPs to MoFPED, LGFC and ministries

by December 31st

viii. The National Budget Conference should be lengthened to cover 2-3 days to

allow more meaningful deliberations and debate on LG financing and other

matters;

ix. MoFPED will table the consolidated draft National BFP (NBFP) to Cabinet by

March 15th and Parliament by April 1st

x. Between April 1st and May 15th the MoFPED should have received input from

reviews undertaken by LGFC, Cabinet and Parliament and sent IPFs and final

grant ceilings to LGs

xi. The LG budget will be layed before Council by 15th June

xii. Approval of LG budget as the last item of the cycle must happen by 29th

June on assumption that Parliament has approved the national budget as is

proposed under the Finance Bill.

The table below shows these changes


Table 5.3 Proposed Annual Planning and Budgeting Cycle

INITIAL CYCLE STAGES Current

Stage Dates

PROPOSED NEW

CYCLE DATES

Action Required to generate the new 19 stage-cycle

1. LGBC agrees on rules &

conditions of budgetary process

September By August 30th 1. LGs to ensure that they have obtained guidelines and

conditions from LGBC on the planning and budget

procedures by August 30th

By September 1st 2. LGFC provides advice to Central Government on the

sharing of national revenues between the central and

local governments.

2. Hold Conditional Grants

Negotiations between Sector

ministries and LGs

October Mid September 3. Purposely to agree on guidelines for budget formulation

and implementation

3. Holding of regional LG Budget

Framework paper workshops

Early

October

By September

30th

4. At the Regional Workshops a memo is discussed showing

technical guidance and communication from MoFPED,

LGFC and other stakeholders

4. LG EC meets to determine inter-

sectoral priorities as identified in

previous DDP

Early

November

By 10TH October 5. LG EC now will identify priorities for that financial year in

line with the longer term 5 year Development Plan

5. Budget Desk prepares the LG

BCC & circulates to HoDs & LLGs

Early

November

By 30th October

6. Budget Desk prepares the LG BCC & circulates to HoDs &

LLGs

6. Sectors start preparing inputs to

BFP

Mid

November

7. Sectors start preparing inputs to BFP

7. Identification of investments &

Preparation of draft DPs

Late

November

8. Identification of investments & Preparation of draft DPs

8. Examination of Draft Sector BFPs

by sector standing committees

Early

December

By November

10th

9. Complete Drafting of the BFP and the years DDP (which is

an extract of the 5 year plan) for review by the TPC

9. Complete drafting BFP for review

by TPC

Early

December

10. DEC meeting with C/Persons of

SSCs & HODs to examine Draft

Mid

December

By November 15

st

10. Stage name unchanged (DEC meeting with SSCs and

Heads of Departments to examine draft BFP and DDP)


INITIAL CYCLE STAGES Current

Stage Dates

PROPOSED NEW

CYCLE DATES

Action Required to generate the new 19 stage-cycle

BFP & DDP

11. Holding and District Budget

Conference and Council Adopts

the Local Government BFP

Late

December

By November 30th 11. Stage name changed from holding of District Budget

Conference for stakeholders’ views and input into the

BFP

12. Budget desk incorporates inputs

from Budget Conference

Late

December

By 31December 12. Stage name unchanged (Budget Desk Incorporates

inputs from the Budget Conference finalizing the BFP

and DDP)

13. Holding of the National Budget

Conference

Early

January

By 15th February 13. The National Budget conference should be a 2-3 day

event to comprehensively engage LGs on the process

14. MOFPEC examines LG BFP & draft

Budget

January to

May

Between March

15th and April 1st

14. By March 15th MoFPED submits revised BFP to cabinet

and by 1st April to Parliament so at the last consultations

with cabinet and Parliament end by April 30th

15. New Stage

LGFC conducts analyses local

government financing and inputs

Between Feb 15th

and 15th Marchth

15. LGFC conducts analytical works on LG financing and

inputs from this process submitted to MoFPED before

discussion by Cabinet and Parliament

16. Budget desk incorporates Grant

ceiling & comments from

MOFPED

May By 15th May 16. LGs receive IPFs from MoFPED and incorporate final

grant ceilings and comments

17. SCC reviews final Annual Work

Plan & Budget

Early June By June 1st 17. LGs SSCs and Finance Committee jointly examine the

AWP and Budget

18. Laying of Budget before Council By the 15th of June 18. Laying of Budget before Council

19. Approval of the budget Before

30thAug

By the 29th of June 19. Reading and Approval of LG Budget on assumption that

Parliament implements new aspect of Budget Act to

approve national budget by June 29th


Fig 5.3 Illustration of Proposed Revision of the central and Local Government Annual Planning and Budget Cycle*

*The dates proposed on this cycle have been arrived at in line with the prevailing realities and current practices over the last

decade. Emphasis is being placed on the provision of more time for LGs to o improve planning and budgeting and in

particular the involvement of LLGs. The proposed Finance Bill aims to bring forward the approval of the national budget to 31

May and the entire budget preparation process will be accordingly shifted to comply with this timeline. The local

governments’ budgets preparation process will similarly be affected.

LGBC agrees on rules and conditions of the budgetary Process which are sent out to all LGs (BY AUGUST)

Departments prepare inputs into the BFP by identifying investments. At the same period Sector Standing Committee begins work on drafted sector BFPs. During this period, HLGs receive and incorporate inputs of LLGs into the BFP (Between 15TH – 30TH OCTOBER)

Complete Drafting of the Budget Framework Paper and the year’s District Development Plan (with is an extract of the 5 year Plan) for review by the Technical Planning Committee (BY 10TH NOVEMBER)

LG Executive Committee and Chairpersons of the Sector Standing Committees as well as Heads of Department examine the final Draft of the BFP and DDP (BY 15TH NOVEMBER)

Holding of the District Budget Conference for Stakeholders’ views and input into the BFP (BY 30TH NOVEMBER)

Approval of Budget and end of the cycle (BY 29TH JUNE) on the assumption that Parliament has approved national budget

LG Sector Standing Committees and Finance Committees jointly examine the AWP & Budget (BY 1st JUNE)

LGs receive IPFs from MoFPED and incorporate information on Grant ceilings and comments (By 15TH May)

Between Feb 15th and April 30th LGFC conducts analytical works on LG financing for input submitted to MoFPED by April 30th

Holding of the National Budget Conference (BY 15th Feb)

Budget Desk Incorporates inputs from the Budget conference and CAO submits BFP to MoFPED then to LGFC and sector ministries (BY 31 DECEMBER)

Holding of all Regional Workshops where contents of the Local Government Budget Framework Paper and discussed (BY 30TH SEPTEMBER)

LG Executive Committee meets to determine priorities as identified in the 5 year Development Plan for the particular financial year and issue of the Budget Call Circular (BY 10TH OCTOBER)

LGFC provides overall guidance of the Budget Process and a memo for dissemination at LG regional Workshops (BY 1ST SEPTEMBER)

MoFPED examines the LG BFPs and Draft Budgets and submits to Cabinet by March 15th and to Parliament by April 1ST

Holding Grant negotiations between sector ministries and LGs (BY MID-September)

Page 57 of 150Final Draft Report

5.4.1 Overall Challenges in the LG Planning and the Budget Process As can be seen from Table 5.1 some improvements are proposed to the planning and

budgeting cycle in line with consultations with officials in LGs and other stakeholders during

this study. These are elaborated below:

a) The National Budget Conference is now being held in January as opposed to

October in the financial year - a change that was done before this study at the

beginning of the 2010/11 FY. This reform in the cycle allows the sectors more time to

draft sector BFPs and for LGs to hold their own District Budgeting Conference so that

at the time of National Budget Conference all LGs and Sector BFPs are almost at the

final stage by 1st February. This was also done to enable the conference discuss

issues raised by local governments in the regional budget conferences. This review

study, however, noted that not much time is provided at the National Budget

Conference to discuss issues affecting local government. It is therefore proposed

that the conference is held for a period of 2-3 days so that more time is given to LGs

to present their issues so that they are subjected to serious debate and

consideration.

b) Negotiations are held between CG ministries and LGs with a view of coming up with

a transparent and effective system of implementing programs funded using

conditional grants. This process is currently not given serious attention as is evidenced

by the junior staff that some ministries send to these meetings. It has been proposed

in Table 5.3 – Stage 2 (above) that the negotiations be held before the MoFPED

issues the first Budget Call Circular.

c) Delays and abrupt alterations of Indicative Planning Figures (IPFs) is a major

complaint of LGs. MoFPED and MDAs should commit and issue IPFs on time. It is

proposed therefore, that final IPFs to LGs are consolidated by MoFPED and sent to

LGs by 30th March and approved by April 30th and no further alterations to IPFs are

made thereafter;

d) Feedback to Lower Local Governments on unfunded priorities.It was also observed

that at the stage of the review of final Annual Work Plan and budget, feedback

should be given to LLGs regarding the justification for not funding some of their

identified priorities. In most cases this is not being done which in many ways dilutes

communities’ trust in the process.

5.5 Key recommendations

Basing on the challenges presented in 5.3.1 above, the study presents recommendations

listed below.

a) Annual Local Government planning and budget cycle

The proposed Finance Bill should include timelines for issuing budget guidelines

including IPFs.

b) Integration between national and local government planning and budgeting

processes

NPA and MoFPED in consultations with the LGBC should review and align the LG

planning and budgeting framework to conform with the new planning and

budgeting processes under the five year NDP. Appropriate guidelines therefore

need to be developed and disseminated to support LGs in the implementation of

an integrated process into the NDP. Where necessary LGs should be assisted to

implement the new framework.


The LGFC needs to be provided further support to strengthen the Local

Government Budgets Committee (LGBC) to coordinate activities relating to LG

planning and budgeting activities for inclusion in the national budget. The

Committee functions and reporting arrangements need to be re-stated and

more funding provided for the Committee to follow-up the implementation of its

decisions.

Provide guidance and earmark some of the shared revenues to go towards

planning and budgeting activities LLGs, where necessary, to ensure that they

submit their plans and budgets on a timely basis to be included in those of the

districts and municipalities. The support should first target particularly poor

performing LGs in terms of involving LLGs.

Implement recommendations of the MoLG Annual Assessments of LGs so that LGs

identify where they need assistance.

In preparing annual budgets LGs should consider accounts in arrears, outstanding

liabilities and guarantees. Internal audit should validate the arrears, liabilities and

guarantees at the end of each financial year before they are fed into the

following year’s budget. Arrears, liabilities and guarantees should be included in

the LGs BFPs.

While funding remains meagre for the planning and budgeting process at LLGs,

more transparency is required in the display of revenues collected and the

proportion (65%) retained by LLGs partly to support this process. Internal audit

should as part of its annual audit programme conduct a revenue collection

performance audit and report to the District Council on its findings.

All the above recommendations do not require drastic revision of the existing laws except

for the recommended merger of the Public Finance and Accountability Act and the

Budget Act. In cases where support to LGs is recommended, targeted areas of weakness

should be addressed on a case by case basis rather than provide holistic support. The

recommendations can be accommodated through the update of the current regulations,

procedures and guidelines.


6 RELEASES, REPORTING AND ACCOUNTABILITY MECHANISMS

6.1 Introduction

Releases are cash provisions of grants which Central Government transfers to local

governments in the course of executing their budgets, to be applied to expenditures

under their programmes in line with their approved work plans. Releases, reporting and

accountability mechanisms play an important role in ensuring that financial resources that

are availed to LGs in time; are used effectively and efficiently; and are reported on timely

basis and attain value for money. Financial and other non-financial reports provide LG

Councils and sector ministries with the data that is used to monitor the implementation of

LG programmes towards achieving their agreed objectives. Accountability mechanisms

are institutional arrangements used to track and record expenditures made by the LG and

to generate periodic accounting reports. Accountability mechanisms also involve

oversight arrangements used to ensure the application of appropriate control measures to

minimise fiduciary risk in the utilization of LG resources. The releases, reporting and

accountability mechanisms are anchored in the Local Governments Act and the

supporting Local Government Financial and Accounting Regulations. The above

legislative framework is further supported by directives and guidelines that are issued by

the MoFPED, MoLG and sector ministries from time to time. All these are done in the spirit

of improving service delivery in the LGs.

The Fiscal Decentralisation Strategy (FDS) underlined the need to reform releases, reporting

and accountability mechanisms to improve efficiency in the transfer system and its support

to the implementation of local government programmes. This chapter therefore examines

the implementation of FDS, the architecture in place for efficient releases, effective

reporting and strong accountably of LG resources, highlighting the trends of all the three

over the period under review. It also brings out the practical realities on the ground and

suggests remedial measures to make them more efficient and effective.

6.2 FDS and release, reporting and accountability mechanisms

The FDS was concerned about inefficiencies in the release, reporting and accountability

mechanisms which would hamper the effectiveness of reforms in the grants transfer system

and their impact on services delivery. These reforms entailed restructuring the grant system

to limit the number of conditional grant to two per sector; one for recurrent and another

for development. In turn, two systems for transferring these grants were to be used; the

Recurrent Transfer System (RTS) comprising conditional grants across all sectors and the

Development Transfer system (DTS) for development conditional grants. To support further

improvements in the transfer system, the following reforms were to be implemented

To reform the release system to match the transfer mechanisms and to increase

efficiency in responding to LG spending plans

to reduce the number of bank accounts maintained by a LG to one per sector and two

others, one for salaries and another for donors to improve capacity of LGs for

maintaining their books of account and reporting on financial and output

performance

As discussed under Chapter 3, the grants system was not reformed as was proposed under

the FDS. However, the number of bank accounts has been reduced to one per sector

resulting in a total of 12 per LG50 plus additional specific accounts for some government

50 Section 6.2.5.1 of the Local Government Financial and Accounting Manual , 2007


programmes like NAADS, LGMSD, CAIIP etc. Reforms have also taken place to the release,

reporting and accountability systems. These are discussed below.

The section that follows reviews the design of the release, reporting and accountability

systems and considers the reforms introduced under the FDS to these systems and current

practices in their implementation. It examines the practices and identifies gaps that will

need to be addressed to improve their efficiencies in supporting local government

financing.

6.3 Releases

Within the context of local government financing, the system of releases is critical to

transferring cash provisions of Central Government grants to local governments to be

applied to expenditures under their programmes.

The release system involves Central Government - MoFPED working with sector ministries,

identifying and transferring cash provisions under unconditional, conditional and

equalisation grants to HLGs on a regular basis. MoFPED advises sectors ministries on the

cash provisions available, ministries prepare schedules advising MoFPED on the level of

releases to each LGs, MoFPED in turn prepares and effects disbursements to LGs. In

general, out of these releases, LGs are expected to disburse non-wage or development

provisions to LLGs or service delivery units (schools, hospitals) as the requirement of the

grant may be, and to make payments to beneficiaries (salaries) for wage grants. FDS51

was concerned about the effectiveness of the release system which was based on

monthly transfers to LGs. The system severely limited the flexibility for in-year planning for

LGs particularly for development expenditures. Delays in making transfers were rampant

with LGs receiving funds considerably late. This was limiting their capacity to absorb these

funds and to use them efficiently. FDS proposed to reform the system to introduce

quarterly releases and reporting for development expenditures. The system was to

maintain monthly releases for recurrent expenditures including wages, but report on

quarterly basis.

Since the passage of the FDS, various reforms to the release system have been

implemented:

In 2003, MoFPED introduced reforms to improve efficiencies in releases of non-wage

grants under Poverty Action Fund (PAF)52. The new system required releases relating

to PAF grants to be made on quarterly basis supported by LG annual work-plans and

quarterly progress reports53. Releases for wage and other non-wage grants

continued to be made on monthly basis

In 2003, the Government established the Local Government Release Operating

Committee (LGROC) to facilitate coordination across institutions involved in releases

– MoFPED, sector ministries, MoLG, MoPS and LGFC, to reduce duplication and

improve efficiency in operations of releases

In 2003, MoFPED introduced integrated financial management systems in 8 LGs. Districts

with access to the IFMS are able to view the releases made instantly

In 2008 - the Government introduced the straight through payments (STP) system

enabling direct payments of salaries to government staff (including teachers and

health workers) across all LGs. The implications are that MoFPED does not need to

release wage related grants to HLGs anymore.

51 Section 5 of the Fiscal Decentralisation Strategy, 2002 52 PAF was set up in 1998 by the Government identifying savings under the Heavily Indebted Poor Country (HIPC) initiative and to

channel them directly towards priorities for poverty reduction under the Poverty reduction Action Plan (PEAP). 53 See PAF General guidelines for planning and operation of Conditional grants


In 2009, MoFPED introduced performance measures to link output to expenditures in

LGs54. The new measures introduced a result orientation to the budget across all

sectors. Along with this, the MoFPED provided new guidelines covering all releases

and replacing the PAF guidelines above. The guidelines extended quarterly releases

to non-wage recurrent expenditures. LGs are required to submit quarterly reports

(Form B55) in order to access the release. The guidelines56introduced the concept of

a “quarter lag57” allowing LGs more time to collect information on performance from

service delivery units and LLGs and to compile reports.

In 2011, Government introduced automatic releases to LGs removing reporting as a

trigger of releases. Non reporting would be sanctioned by MoLG an OPM by

targeting the defaulting Accounting Officers. Sector ministries are required to report

the non-compliant LGs to the authorities empowered to take the administrative

measures.

6.3.1 Key findings in the release system Respondents in the study reported significant improvement in the release system as a result

of the reforms above; both the quarterly system and direct payment system have

improved the predictability of releases. However, there remain issues related to (a),

implementing the guidelines, (b) delays in releases, (c) managing balances that remain

unspent at the end of the financial year, (d) multiple release transfer systems, (e)

synchronising releases and service delivery cycles, and (f) releases channelled through LGs

to service delivery units. These issues are discussed further below

a) Implementing the quarterly release guidelines

Procedures under the Revised guidelines on releases to Local Government issued by

MoFPED at the beginning of 2010/11 require LGs to provide work plans and reports (Form

B) as a basis for sectors to determining the release for the following quarter by the Sector

(see also box 6.1)

Box 6.1: Extract from Revised Guidelines on releases to Local Government in FY2009/10

Section 3.4: Procedure to process releases at the Central Government level

i) After receiving the work plans and reports (Form Bs) from local governments, the

MoFPED will confirm consistency of the soft and hard copies before sending the soft

copies to the relevant sector Ministries by email.

ii) The sector Ministry will extract the relevant departmental work plan(s) and progress

report for review and analysis and advise MoFPED by 10th day of the first month of the

quarter;

iii) The MoFPED will effect the release to the local governments on a quarterly basis by

15thday of the first month of the quarter. The releases will be effected once in that

quarter.

iv) If a local government fails to submit the work plans or progress report in that quarter

on time, no release will be made for that local government. Such a local

government will receive the release in the next quarter.

v) The action in (iv) notwithstanding, the release for the subsequent quarter will include

all the funds not released in the previous quarter up to the cumulative cash limits.

These procedures were put into effect in 2010/11. However, following a Presidential

Directive barring the use of progress reports (Form B) as conditions for release (see iv in box

54 See Performance Contract Form B release modality, Revised guidelines on releases to local government, FY209/10 55 Form B was introduced to report on both financial and non-financial performance on quarterly basis 56 General guidelines on modalities for reporting and release of funds to Local Governments, 2009 57 Under the “quarter lag” arrangement, releases are based on the reports of the quarter before the previous, this quarter release

is based on first quarter reports.


above), MoFPED no longer enforces these procedures. Rather, in 2011/12, release have

been made regardless of receipt of reports by LGs. Sectors have raised concern about

falling standards in LG reporting impacting negatively on their monitoring role over service

delivery

b) Disbursing releases

Under the quarterly system, MoFPED is required to effect releases to LGs by the 15th day of

the first month of the quarter. Using EFT, the transfer is made through the banking system

taking up to 1-2 days. In the worst circumstances, LGs should receive releases within 3-4

weeks from the start of the quarter. The table below shows the experience for the period

2011.

Table 6.1 Illustration of period Between Release and Receipt of non-wage grants in Wakiso LG

QUARTER DATE OF RELEASE

(Source – MoFPED)

DATE OF

RECEIPT BY

WAKISO LG

Period

between

release

and

receipt

(weeks)

Period

between

start of

quarter and

receipt of

funds.

Financial Year 2011/12

Qtr 1: Jul-Sep ‘11 PAF / Non-

PAF 20/07/2011 09/08/2011 3 6

Qtr 2: Oct-Dec

‘11

PAF / Non-

PAF 20/10/2011 02/11/2011 2 5

Qtr 3: Jan-Mar

‘12

PAF / Non-

PAF 16/01/2012 01/02/2012 2 4

Qtr 4: Apr-Jun ‘12 PAF / Non-

PAF 10/04/2012 08/05/2012 4 5

Average delay in releases across the Financial Year 2011/12 3 weeks 5 weeks

Source: MoFPED and Wakiso LG

Releases are made separately for recurrent and development grants. This table refers to

non-wage recurrent releases only. In the table, the date of release is the date of MoFPED’s

letter effecting the release. The date of receipt by Wakiso District is when the district

received the money on their general collection account. On average, Wakiso received

cash transfers about 3 weeks from date of release of funds by MoFPED. This period is the

time taken by the Budget Directorate to advise Treasury on the releases and in turn, the

Treasury to advise BoU after which the actual transfer is made to LG accounts. The actual

release advice may come 1-2 weeks later.

c) Un-spent balances

The law (Section 19 of the PFAA-2003) requires LGs to return balances of cash releases

under the conditional grants that remain un-spent at the end of the financial year to the

Central Government (Consolidated Fund). LGs are constrained to absorb cash provisions

in the 4th quarter particularly when releases are made late. This mostly relates to

expenditure that involves commitments and contracting due to inadequate planning and

procurement practices. While the date for mandatory return of unspent balances has

been relaxed58 to allow LGs to retain funds where they have entered into commitments by

June 30th, there is a danger that the funds may not be utilized for the right purposes as

58See paragraph 133 of the budget speech for 2010/11


there may be rush spending of unutilized funds at the end of the financial year. Despite

this, there is still evidence of funds that remain unutilised as shown in the table below.

Table: 6.2 Unspent balance on development releases for selected districts for FY2010/11

(Shs ‘000)

Local Government

Development

Releases

2010/11

Unspent

balances (Devt)

2010/11

Proportion of unspent

balances to releases

(development)

Masindi 3,490,818 60,724 1.74%

Kisoro 2,241,636 102,678 4.58%

Mpigi 2,047,230 432,194 21.11%

Soroti 3,461,853 1,196,882 34.57%

Kapchorwa 2,374,190 653,593 27.53%

Arua 7,103,102 373,630 5.26%

Luweero 3,096,057 253,579 8.19%

Kiruhura 2,921,716 59,758 2.05%

Total 26,736,602 3,133,038 11.72%

Source: Form B provided by the districts for 2011/12

In all the districts in the table 6.2 above, unspent balances were under the development

and conditional grants. This indicates that unspent balances are caused in part by the

long procurement / commitment processes. A second emerging issue is inconsistency in

reporting of unspent balances. The records provided by MoFPED for the year 2010/11 show

a total amount of UGX537million for unspent balances. However, indication from the 8

districts in the table above shows a figure in excess of UGX3bn.

d) Transfer system and fragmentation in the release system

The bulk of releases are made by the MoFPED through a single transfer. Up until 2010/11,

funds under the secondary grants were transferred to schools by the sector ministry –

Ministry of Education and Sports however, this has now been shifted to MoFPED. Transfers

under the road maintenance grant areeffected by the Uganda Road Fund, outside the

channel provided by MoFPED. Separate channels of releases are a sign of a fragmented

system and increase transaction costs to the recipient LGs as they encourage multiple

reporting – which is a burden for accounting officers.

e) Release and service delivery cycles

Release to education and agriculture do not match cycles for services delivery. Releases

to the LGs are made on the basis of a quarterly cycle which is out of step with their

spending cycle (academic cycle or agriculture seasons). For example, education grants

are released at the end of the term rather than at the beginning of the term. Sharing

releases across service delivery units is expected to follow guidelines issued for each of the

grants. It is therefore expected that there would be consistency in the allocation of funds

by LGs. However, an examination of releases to some of the schools during 2009/10 and

2010/11 identifies variations in the allocations per child, see table below.


Table 6.3Variations in the rate per child Applied under Selected schools under UPE Grant

Name of Primary

School Name of District

Enrol-

ment

Fixed

amount Variable Total

Rate

per

student

Transfers in 1009/10

Kashwa P.S. Kiruhura 440 900,000 1,659,706 2,559,706 3,772

Ambalal PS Lira Municipality 1,584 900,000 6,618,309 7,518,309 4,178

Nadunget PS Moroto 350 900,000 2,080,443 2,980,443 5,944

Kichinjaji PS Soroti 1,278 900,000 4,799,282 5,699,282 3,755

Transfer in 2010/11

Kashwa PS Kiruhura 547 900,000 1,944,190 2,844,190 3,554

Ambalal PS Lira Municipality 1,569 900,000 4,742,000 5,642,000 3,022

Kichinjaji PS Soroti 1,467 900,000 5,382,946 6,282,946 3,669

Kifuyo PS Namayingo 1,103 900,000 2,080,000 2,980,000 1,886

Source: Field Data and MoES

The inconsistency in the rates allocated per child identified in the table above is a pointer

to weaknesses in applying the rules provided in the guidelines. LGs may be exercising

discretion in the application of these rules.

f) Releases to service delivery units through LGs

In recent years, the Government began to implement a system of direct transfer of

releases or payments to service delivery units. This has been implemented for staff salaries

through straight through payment and to secondary schools through direct disbursements.

LGs were unanimous that the system of direct transfer has improved the payments.

However, service delivery units, in general were concerned that funds disbursed through

LGs are delayed by up to 3-4 weeks before they are received. Secondly, LGs also raised

concerns that they are often not informed about disbursements to secondary schools;

requisitioning or reporting is not made through them. This however does not apply to staff

salaries. While salaries are paid directly to staff, Central Government releases are based on

the advice and payroll schedulessubmitted by LGs.

6.3.2 Recommendations: MOFPED should continue to implement efforts to improve the timeliness of releases by

complying with the timelines specified in the release and reporting guidelines as well

as the budget execution circular. In this regard, MoFPED should examine the options

to make the quarter 4 releases early, within the first 2 weeks of the quarter at the

latest, to improve utilization of the grant transfer and to minimise the level of funds

returned to the Consolidated Fund when the financial year closes.

Other possibilities could include the commitment of funds early in the year and re-

budgeting for the uncompleted activities in the next financial year. All budgets for

the next financial year should as a starting point include on-going and uncompleted

projects in the current financial year.

LGs should be supported to be able to adequately budget for development expenditure

by producing appropriate procurement plans and the associated cash flow

projections. MoFPED should as much as possible provide LGs with the funds as

requested. Similarly, LGs should commence the procurement process early rather

than waiting to commence it when funds have been received from MoFPED.

Review and reverse the directive withdrawing the use of LG progress reports (Form B) as

conditions for quarterly releases


End of year procedures which require the return of unspent balances should be clarified

further to ensure there is greater consistence in reporting both by LGs and the

Treasury.

Widen and deepen the direct transfer of funds to all service delivery units. In this regard,

the direct transfer system should be extended to primary schools in the same way as

secondary schools. However, all schedules for payment must be submitted by LGs

on a timely basis. Service units should also be required to file quarterly reports of

performance to LGs who will be given an opportunity to comment on the

appropriateness of the reports.

The Ministry of Education should review the Education Act and issue regulations to

strengthen the reporting arrangements between the head teachers for secondary

schools and the LG administration. This should ensure that secondary schools

transfers are requisitioned by LGs, secondary schools provide quarterly reports to LGs,

and LG increase their supervision and oversight over secondary schools.

6.4 Reporting

The reporting system enables LGs to inform their councils and Central Government about

the utilisation of the financing provided under the grant system. FDS sought to reform the

reporting system to reduce the burden experienced by LGs in preparing various reports to

meet sector requirements. The FDS envisaged a reporting architecture as laid out in Box 6.1

below. The reforms under the FDS were intended to simplify the reporting system to reduce

the number of reports to one common report serving the needs of all sector ministries and

which LGs could use for their reporting needs as well.

Box 6.1: Extract from FDS on the planned reporting architecture under fiscal

decentralisation

Flow of Reports

.

Monitoring & Mentoring

.

Mentoring Only

.

Sharing of Information.

* Accountability Institutions made up of IGG, Auditor General & Office of the Prime Minister, Office of the President

BOX 6D: FRAMEWORK FOR LOCAL GOVERNMENT REPORTING AND FEEDBACK

CENTRAL GOVERNMENT

LOCAL

GOVERNMENT

LOWER LOCAL GOVERNMENTS

DISTRICT/MUNICIPALITY

MFPEDSector Ministries Accountability

Institutions*

1

2

3 3

LGFC MoLG

3

FLOW OF REPORTS AND ACCOUNTABILITY REQUIREMENTS

1. From Lower Local Governments to District/Municipality - Lower local governments will be required to

submit regular expenditure and output reports to track progress in implementing activities

2. From District/Municipality to Central Government - Districts/Municipalities will submit one consolidate

report for the recurrent transfer budget and one for the development transfer budget per quarter to MFPED. This

will consist of a consolidated expenditure report, reconciled with and accompanied by the relevant bank

statements and simple one page output reports for each sector grant.

3. Within Central Government - MFPED will distribute the reports to the concerned sector ministries,

accountability institutions, LGFC and MoLG. Sector Ministries will analyse reports and advise on releases.

MENTORING & MONITORING

From Central to Local

Government - Sector Ministries,

MoLG and Accountability Institutions

all have an important role in

monitoring of local government and

providing technical support and

feedback to local governments. The

importance of sharing of information

and coordination of monitoring

activities will be emphasised and the

LG Operations Committee will play a

lead roll in ensuring this occurs.

Within Local Governments -

Districts/Municipalities are

responsible for monitoring activities

carried out in their local governments,

and for providing technical support to

lower local governments.

Local Gov't Information Centre

There should be a centre in MoLG

or MFPED where all LG

accountability reports, monitoring

reports and other correspondances

are kept. LG and Central Gov't

actors will be able to access LG

information easily.

3

Source: Fiscal Decentralization Strategy 2002


Since the adoption of the FDS, efforts have been taken to reform the reporting system – in

essence operationalizing steps 1, 2 and 3 in Box 6.1 above. Beginning2004/05, MoFPED

issued guidelines for budgeting under the FDS which included a substantial section on

reporting. The guidelines introduced a concept of financial and non-financial reporting.

The PAF guidelines for planning and operations of conditional grants issued by MoFPED in

the same year further clarified the structure of reports based on the concept of

performance reporting.

The issuing of a one format for LG Budget Framework Paper (BFP) was the first bold step to

establishing common reporting system. The LG BFP provides a section for reporting under

each sector but using standard formats. Most of these efforts have focussed on Step 2 in

the box below but in turn strengthened step 3 supported by the MoFPED’s fiscal

decentralisation unit under the Budget Policy and Evaluation Department. Other capacity

building efforts, under MoLG, have supported the development of work plans and reports

between LLGs and HLGs (step 3)

In 2008, the Government introduced reporting based on Form B59 for LGs (Step 2 in Box 6.1

above) replacing earlier reporting formats under FDS for service delivery reporting. Form B

was designed to provide a direct link between budget allocations and expenditure and

the services delivered. Form B incorporates an annual work-plan, quarterly work plans and

sections for reporting under each sector. It is thus designed to provide one common

reporting mechanism for all the sectors. Form B reporting has since been adopted as a

requirement for accessing cash releases. In this regard, all MDAs are required to specify

the indicators against which they wish LGs to be assessed for purposes of accessing

releases60.Form B is an output of the Output Budgeting Tool (OBT). OBT is yet to be

extended to LLGs.

6.4.1 Findings related to reporting However, the study finds that:

a) LGs continue to be burdened by a multiplicity of reporting requirements. Sectors

have not fully adopted Form B to their reporting needs. All districts that were visited

demonstrated they were required to prepare separate sector specific reports – see

table below. MDAs point to limitation of the information provided through Form B to

meet their reporting needs. Perhaps realizing this, the Form B release guidelines

include a provision (Section 3.1(iii)) allowing sector to request LGs for additional

information Sector ministries require information from LGs to advise on releases,

performance on outputs, and where there are gaps to provide technical support,

mentor and build capacity for better services delivery.

Table 6.4: Average number of reports prepared by a LG in key sectors on annual basis

Sector / Area OBT Sector

specific

Donor

specific

Total

number

of

reports

Education 4 3 - 7

Health 4 4 2 10

Water 4 2 - 6

Works 4 4 2 10

59 Form B was created for performance reporting by LGs while Form A provides performance reporting for Central Government agencies. 60 Refer to Revised Guidelines on Releases to local government – 2009/10, Section 3.1(ii)


Agriculture / Production 4 3 2 10

b) The directive provided by the President effectively removing the requirement for

using quarterly progress reports (Form Bs) as a condition for releases has weakened

the implementation of Step 2 in the box above.

6.4.2 Recommendations MoFPED should continue to engage sectors ministries to adopt their reporting

requirement to Form B.

OBT and Form B reporting should not be rolled out to LLGs until the current challenges

faced by HLGs have been addressed.

Efforts to support LGs in the use of OBT and Form B should be intensified. Furthermore, LGs

should appreciate that both OBT and Form B are not tools only to be used in order to

get funds from MoFPED but they are also useful in assisting LGs to manage and

monitor their activities in order to achieve the budgeted outputs.

6.5 Accountability mechanisms

Accountability mechanisms or systems are arrangements established by the Government

to ensure financial resources are used in accordance with approvals and for the purpose

intended. Accountability systems involve the exercise of appropriate controls in executing

financial transactions, and proper recording and reporting on the transactions.

Accounting and internal audit roles, as well as oversight functions by Councils, are at the

centre of accountability mechanisms. FDS required that capacity of these functions be

strengthened to minimise fiduciary risk in the management of grants particularly as more

discretion was being granted. Government has since taken steps to strengthen

accountability through the following actions:

In 2005, the Government reviewed structure of local government to provide

sufficient staff in the functions of accounting and internal audit. Internal audit

department have since been established across all HLGs

In 2007, the Government revised and issued the LG financial and accounting

regulations along with a manual to guide LGs on accounting and financial reporting

operations. Training and capacity building have been conducted in regard to these

regulations.

Annual external audits have now been extended to all LGs.

6.5.1 Key Findings related to accountability However, despite the above actions a few challenges remain in the accountability

mechanism as listed below:

The Local Governments Act (Cap243) and the associated Local Government Financial

and Accounting Regulations are robust enough to ensure proper control and

management of funds by LGs. However, compliance with the Act and the

associated regulations remains a big challenge as is evidenced by the internal audit

reports. Most of the LGs visited did not have a properly functioning commitment

control and vote system to ensure that they did not spend beyond their budgets.

Both internal audit and external audits regularly report non-compliance with the Act

and regulations especially in the procurement area where substantial sums of money

are lost annually by LGs.


The internal audit function should provide assurance that the resources made available

to LGs are used effectively, efficiently and with economy. However, the function is

encumbered by the limited staffing; more than half of the 12 LGs in the study have

only one internal audit staff whereas four (4) staff would be an ideal number. Table

6.5below shows the deficiencies in staffing in the internal audit departments in 12 LGs

visited:

Table 6.5 Staffing gaps in the internal audit departments in LGs

Name of Local

Government

No of Staff in the Internal

Audit Department

Ideal

Number

Staffing Gap

1. Kisoro 2 4 -2

2. Kiruhura 4 4 0

3. Masindi 3 4 -1

4. Oyam 1 4 -3

5. Mpigi 2 4 -2

6. Arua 3 4 -1

7. Moroto 1 4 -3

8. Soroti 2 4 -2

9. Namayingo 3 4 -1

10. Luweero 4 4 0

11. Kalanga

la

2 4 -2

12. Kapchor

wa

3 4 -1

Average

staffing

2-3 staff 4 1-2 staff

Source: Field Data

As can be seen from the table above, only Luweero LG had the complete staffing

requirement in the internal audit department in all the 12 LGs visited. Some LGs like

Moroto and Oyam were relying on only one resource person in the department to

oversee audits in all 12LG departments very quarter of the year. To improve the audit

function, capacity needs to be built for LGs to recruit, retain motivated auditors with

logistical and analytical facilitation to carry out this function as is desired.

Another aspect of the audit function is the weak linkage between LG Accounts

Committees (LGPAC) and the national PAC. In the LGs visited internal auditors

expressed concern about the limited engagement and communication between

internal audit departments, district PAC and LG PAC in Parliament.

The limitations of the internal audit function in LGs are presented in two main ways:

a) Limited Funding: Financing to the internal audit function remains limited and

generally insufficient to facilitate the departments’ activities. Funding for the

functions is drawn from the non-wage unconditional grant or LG local

revenues which have continued to decline in many LGs over the last five years.

Table 6.5 showing the level of funding for the Internal Audit Department as a % of

total expenditure


Name of

Local

Government

Budgeted

Allocation for

Internal Audit

(2009/10)

Actual

Provision

(2009/10)

Total LG

Actual

Expenditure

(2009/10

Actual Provision

(2009/10) as a

% of Total

expenditure

Kiruhura 29,167,266 28,054,060 11,463,521,872 0.24%

Kisoro 42,585,057 42,585,057 13,290,137,521 0.32%

Moroto 29,924,912 27,351,920 11,603,705,783 0.24%

Masindi 75,626,220 65,878,447 22,255,572,888 0.30%

Kumi 23,000,000 19,951,700 17,971,967,548 0.11%

Budaka 14,788,291 7,152,650 9,128,650,279 0.08%

Amuru 32,938,000 12,388,500 13,103,631,219 0.09%

Average 35,432,821 29,051,762 14,116,741,016 0.2%

Source: District Final Accounts of FY ending June 2010

As can be seen from table 6.5 above the internal audit function receives 0.2% -

a very meagre allocation of the district spending envelope.

b) Most Councillors who are expected to oversee the LG financial management

system and to monitor programmes have difficulties in interpreting reports and

provide technically relevant comments as would have been desired.

6.5.2 Recommendations Implement a program to strengthen the capacity of internal audit function including

improving their staffing levels, providing training and requiring LGs to allocate

sufficient funds to meet their basic operations including for value for money

investigations.

A properly functioning internal audit function goes a long way in ensuring that LG

resources are put to proper use and are used efficiently. The funds that are spent on

internal audit are recovered several times over through the funds that are saved

from misuse and waste. It is therefore imperative that adequate funding is provided

to the internal audit function at LGs.

Implement a program to improve capacity and facilitation of Councils in their oversight

role. In particular, continue to sensitise them on LG financing issues, use simplified

forms to provide information to them on budgets and improve levels of financing to

meet costs for inspection of programmes and projects and other requirements.

Additionally targeted refresher courses should be provided to select weak Councils.

Barazas should be utilized to sensitize communities about their rights and obligations

towards supporting LGs to achieve their mandates and improving services delivery.

Barazas can serve to enlighten communities to desist political interference in LGs

operations.

The Public Finance Bill should be reviewed to incorporate relevant provisions regarding

the management of CG grants to LGs. Particular attention should be paid to the

releases, reporting and accountability mechanisms for CG grants.

All the above recommendations do not require revision of the existing laws. The

recommendations can be accommodated through the update of the current regulations,

procedures and guidelines. The recommendations do not have major funding

implications.


7 LOCAL REVENUE ENHANCEMENT

7.1 Background

Revenue refers to a sum of payments made to a local government by individuals and

organizations meant to finance service delivery and devolved expenditure functions within

a local government area and within the jurisdiction of a local government as approved by

an Act of Parliament. In Uganda, the authority of Local Governments (LGs) to collect

revenue is granted under Article 191 of the Constitution. The Local Government Act (Cap

243), under the Fifth Schedule as amended, further elaborates the sources from which LGs

may collect these revenues. These include:

i. Local Service Tax (LST);

ii. Local Government Hotel Tax (LGHT);

iii. Taxes on property and land transaction charges;

iv. Rent, Rates and Royalties;

v. Cess on Produce;

vi. Fees on Registration and Licensing; and any other revenue which may be prescribed

by the local government and approved by the minister.

LGs allocate revenue collected from these sources to supplement expenditure functions

listed in the second schedule of the LGA (Cap 243). Local revenues provide the most

discretionary source of financing and therefore Local Revenue Enhancement (LRE) is a

critical component of LG financing. LRE entails a series of mechanisms to expand

opportunities to increase returns from revenue sources of LGs. Local revenue is the source

of financing for recurrent operations of LGs and the sustainability of infrastructure

investments. LGs are mandated under the Constitution and the Local Government Act to

provide management services and other program activities including planning, budgeting

and supervision of services delivery, oversight functions of Councils, operation and

maintenance (O&M) including maintenance of building infrastructure, and other basic

logistical works among others.

Over last decade, the inadequacy of locally generated revenue has remained a major

challenge for LGs. Besides the generally slow growth in revenues, the real resource value

has been declining especially since 2004/05 FY when the Graduated Tax was suspended.

As a result of the decision to suspend the Graduated Tax, the contribution of locally

generated revenues has declined in significance, on average, falling to under 5% of all LG

financing. This has led to a greater dominance of CG transfers for financing to LGs which in

turn has further eroded t the fiscal discretionary power of Local Governments. The

DPSF61points to the increasing inability of LGs to finance operation and maintenance of

their investments in the wake of receding local revenues. The 2005 PEFA report raises similar

issues noting that most grants from CG did not provide the flexibility to allow LGs to

exercise discretion in spending especially on the maintenance of the infrastructure stock.

As a result, the focus has been more on minor repairs leading to a backlog of rehabilitation

and reconstruction which is partly the cause of breakdown of public infrastructure

investments like bridges, boreholes and roads. Studies have also attributed the increase in

CG transfers as a factor contributing to the declining trend in locally generated revenues

by reducing the incentive for LGs to collect taxes62. Efforts to counter this development by

61Decentralisation Policy Strategic Framework (2006), Page 25 6262LGFC, Allocation Principles, Formulae, modalities and flow of CG transfers, 2003, and Fiscal Decentralisation Strategy, the way forward,

2000


introducing different incentives such as limiting the emoluments and allowances of LG

political leaders to no more than 20% of the total revenues collected63 appears not to

have been effective in arresting the trend. It is against this backdrop that this review

explores measures to enhance locally generated revenues and determine the level of

support needed to pursue improvements in this regard. This chapter analyses options to

enhance local revenues and provides:

i. An assessment of whether current revenue sources are easy to administer;

ii. An assessment of whether the current sources of revenues correspond to local service

delivery and offer benefits including local economic development for residents;

iii. Suggestions for possible new revenue sources and administrative initiatives that

broaden the revenue base and contribute to service delivery, participation and

accountability; and

iv. Make recommendations to enhance equalisation of service delivery between local

governments; and determine whether there is adequate support at the centre to

pursue improvements in local revenue.

7.2 Local Revenue Administration in Uganda

Local revenue administration is one of the challenges that has threatened to undermine

the successes so far made under the policy of decentralisation.

7.2.1 Legal Provisions on Local Revenue Generation

The current legal framework supports LGs to levy and collect local revenues from sources

stipulated in the Fifth Schedule of the LGA (CAP 243) with approval of Parliament under

Article 191 (1) of the Constitution of the Republic of Uganda. The power and authority to

levy and collect fees and taxes are provided under section 80 (3) of the LGA (Cap 243).

LGs collect locally generated or own source revenues with a lot of challenges, which will

be presented later in this chapter.

7.2.2 Local Revenue Administration in Local Governments

A typical revenue structure is predominantly composed of direct taxes on personal

income under LST, wealth tax through property rates, taxes on consumption through user

charges on services rendered, and production through permits, licences, Cess on

agriculture production and business levies. In the recent past, taxes on property and user

levies have become more prominent than direct taxes on personal incomes and wealth.

LGs in Uganda have both limited powers to raise revenues and limited capacity to

manage and collect the taxes that have been authorized64. Almost all revenue instruments

including guidelines for administration are dictated by the centre.65Revenue administration

entails the following process:

i. Policy formulation which considers issues of equity, political acceptability, and revenue

potential;

ii. Identification and registration of all taxpayers under different categories;

iii. Collection which involves the actual methodology of receipts of revenues whether

by using force account or contractors; direct cash receipts or payment direct to

bank accounts of LG;

63Local Government Act (Cap243), first schedule, section 4

64LGFC, The performance and challenges of the current local revenue sources, sept.2010 pgs 11-16, shows severe administrative

problems in all revenue categories.

65Article 152 of The Constitution, all revenues must be approved by Parliament.


iv. Enforcement, following up on defaulters and ensuring that all those eligible to pay

actually pay either through legal or other action; and

v. Reporting and accountability; and taxpayer sensitisation and publicity which may

involve the holding of workshops, rallies and other forms of tax awareness

campaigns.

7.2.3 Support from the Central Government to support Local Revenue Enhancement

The FDS framework was intended to create an incentive for increased revenue collection

at local government level. However, there is a feeling in some quarters that the increase in

transfers has reduced the incentive and initiative to raise revenues locally, this is based on

the fact that whereas transfers from the centre have grown nominally by over 300% over

the decade, locally raised revenues have had a slower growth rate even in nominal

terms.The Government through the MoLG and LGFC has been implementing a series of

interventions, including capacity building, training support and studies to assist LGs in

revenue administration. These have included:

i. Benchmarking of local revenue enhancement best practices;

ii. A guide for prioritization and selection of revenue enhancement best practices based on

Cost Benefit Analysis;

iii. A guide for estimating the local revenue potential;

iv. Procedures for using Public Private Partnerships more effectively in local revenue

mobilization;

v. A guide to operationalize LST and LHT;

vi. A guide for streamlining royalty fees;

vii. Performance and practices regarding land - based revenues;

viii. A guide for using an incentive framework for local revenue mobilization; and

ix. Other initiatives have included Local Economic Development (LED) through a LED

policy aimed at boosting economic opportunities for business in LGs and

subsequently widening the tax base. The LED five-stage process is presented in Table

7.1:

Table 7.1 LED Process in LGs

Led Strategies How To Implement

District structures as a Forum

of Stakeholders (FoS)

District structures constitute themselves as a Forum of

Stakeholders (FoS) in a manner that ensures that the

strategy is based on sound and representation and

that in this forum businesses, government agencies

and NGO are mobilized to participate;

District conducts an in-

depth Tier Economic

Assessment (RTEA) followed

by a rapid appraisal

immediate, medium term

and long term economic

prospects

Each LG conducts an in-depth Tier Economic

Assessment (RTEA) followed by a rapid appraisal

immediate, medium term and long term economic

prospects for the Tier to plan for a feasible yet phased

public investment. Proposal can then be written for

support from development partners. Such a proposal

can highlight the Tier’s 5-10 year local economic

special features;

Design of a District business

profile displaying ‘business

winners’

Design of a District business profile displaying ‘business

winners’ who may involve farmers, processors,

industrialists, bankers, traders and entrepreneurs who

are exemplary and organize galas, competitions and

awards of ‘Cups of Excellence’.


Led Strategies How To Implement

District own LED strategy District develops own Local Economic Development

Strategies from a review of SWOT66 of development

opportunities and use this to design a costed social

economic development, and business profile;

Investments are linked within

the national framework

The strategy can be presented for adoption and

implementation either by the District or as a joint

partnership with the Central Government so that local

investments are linked within the national framework

on economic development.

Source: Adapted from the LED Concept note of UNCDF (2006)

It is important to note that even though these initiatives have been put in place LGs have

continued to grapple with revenue administration and the challenge to generate and

collected their own source revenues.

7.3 Analysis of Performance of Local Revenue Sources

Access to adequate revenues for local governments is one of the critical success factors

for the long-term sustainability of investments in service delivery and the administrative

structures needed to achieve the objectives and goals regarding the policy of

decentralization and good governance. Over the last five years, there has been a decline

in revenues collected by LGs especially following the abolishment of the graduated tax in

FY2004/05 which had realized a total collection of Shs.60billion. In an attempt to

compensate for this shortfall, Government introduced two new sources of revenue: the

Local Government Hotel Tax (LGHT) and the Local Services Tax (LST). These two newly

introduced taxes have been unable to fully compensate for the financing gap created by

the abolished GT which was projected to raise over Shs.100billion at 2011 prices and

general incomes. Table 7.2 below shows local revenue trends between 2002/2003 and

2009/2010 and noting the level of GT before abolition

Table 7.2 Trends of Local Revenue Performance by Source (Uganda shillings ‘000,000) Source 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11

Graduated tax 36,526 60,039

Mass taxes(LST,LHT)

10,866 4,429 0 4,823 10,690 12,29467

Prop. Tax 6,788 3,526 26,716 37,817 28,487 24,936 45,598 52,438

Business Licenses 5,805 4,091 12,206 11,779 13,479 9,171 13,369 15,374

User fees and other

revenues 30,987 22,705 50,877 44,630 73,919 79,780 73,145 84,117

Totals 80,107 90,361 100,665 98,655 115,885 118,710 142,802 164,223

Source: LGFC Fiscal Data Bank, 2010

Further analysis indicates that there is no discernible trend in revenue trends. In a majority

of cases there is a wide variation between budgeted and actual revenues over the

period, reflecting severe uncertainty or poor forecasting data or other revenue

administration problems. However significant growth in user fees and charges, has resulted

into an overall increase in nominal revenues from Shs.80.1billion in 2003/2004 to

Shs.118billion in 2008/2009 and Shs.164 billion in 2010/11.

66SWOT refers to Strength, Weaknesses, Opportunities and Threats 67 Only includes collection from one category, salaried personnel.


7.3.1 Rural and Urban Local Revenue Trends Nationally, Districts contributed 78% of all local revenues in 2008/09 FY with town councils

and municipalities each contributing 11%. The creation of a new district results in the

establishment of at least two self-accounting urban councils where most property tax,

commercial licenses and permits and well established markets represent viable revenue

sources. The predominant tax revenue for rural areas is a mass income tax which has since

been eroded by political action. This phenomenon has resulted into a significant revenue

shift from rural to urban areas as shown by Table 7.3 below.

Table 7.3 Rural – urban revenue trends

Levels of Administration 2008/2009 2009/10 2010/11

Town Councils 9,954,395 21,350,255 27,755,332

Municipalities 10,031,655 25,110,523 32,643,680

Districts 72,892,984 54,201,609 56,911,689

Total 92,879,034 100,662,387 117,310,701

Share of rural LGs (%) 78% 54% 49%

Share for urban councils 22% 46% 51%

The contribution from Districts drastically fell from 78% to 49% while urban councils grew

from 22% in to 51% in 2008/09 and 201/11 respectively. Increasing establishment of new

self-accounting urban councils following creation of new district more specifically will

continually reduce the revenue bases for the rural areas and result into increased

financing gap for services. The figure below further illustrates the revenue shift between

urban and rural local governments.

Fig 1: Changes in Revenue Contributions between 2008/2009 and 2009/2010

Source: consultant analysis of LGFC Data 2012

Rural districts tend to have fewer tax eligible residents and in many cases the levels of

income are lower. This increases tax administrative challenges and weakens revenue

collection potential. By implication, rural districts have a reduced ability to finance the

expected services. Moreover, while their resource base has been reduced their mandates

remain unchanged.


7.3.2 Source by Source Analysis

a) Graduated Tax

The suspension of graduated tax (GT) after the 2004/05 FY presented the largest decline in

local revenue for LGs. In the year prior to abolition, graduated tax contributed a net total

of Shs. 60billion. With an assumption of an average inflation of 10% per annum and

persistent growth factors, it is estimated by this report’s analysis that by 2011/12 the

graduated tax would have been contributing up to Shs.105billion. LGs were also charging

an additional 10% of graduated tax payable as Education, Development Tax and others.

The additional 10% on graduated tax was used for expenditures such as a grader for

Wakiso, and administrative blocks in Bushenyi, Sironko, and Ntungamo.

To compensate for the losses emanating from the suspension of GT, Government

introduced GT compensation to LGs. The GT compensation initiative has not been more

than Shs.34billion p.a. for all LGs since the date of abolition, resulting into a net annual

shortfall of about Shs.71bn. Seeing that this was not tenable, Government agreed to

introduce the LST and LGHT in 2010/2011, but these sources combined realized only about

Shs.6billion in 2011/12 FY resulting into an apparent shortfall of Shs.97billion68 from this

source alone,. The LST suffers the same challenges as GT and may require a significant

change in public and political attitudes if the tax is to make any contribution to service

delivery.

b) Increase of VAT from 17% to 18% to finance LGs

In 2006, one of the attempts to increase the compensation to LG due to the loss of

revenues from the suspension of GT was to increase VAT from 17% to 18% with an

underlying intension of transferring the complete proceeds from the 1% VAT to LGs. The

MoFPED had projected the yield from this initiative to generate Shs153 billion. If this

amount had been transferred as planned, the financing challenges of LGs would have

been significantly eased, but this did not happen. The decision to not fully address this

funding gap has resulted in wide deficits in the quality and quantity of services being

provided. The decision also resulted in LGs having no funding for monitoring and

supervision.

c) User charges and licenses

User charges and licenses show a significant growth between 2007 and 2010. This may be

an indication of the impact of increased rates for trading permits and licenses rather than

efficiency in revenue management. However, it is evident from economic growth indices

that there is an increase in trading premises and business in most of the urban areas in

Uganda which in itself creates an opportunity for revenue expansion. The recent revision of

rates for trading licenses and permits has made it difficult for some low income LGs to

collect the prescribed licenses and permits. LGs do not have discretion legally to change

these rates to suit local economies and in most cases no collection has been done. The

growth in user fees indicates that there is more willingness to pay revenues that directly

respond to services obtained and to conclude that future reforms should focus heavily in

the area of user fees or direct contribution to service costs.

d) Property Taxes

Property taxes have grown slower than anticipated, at about 45% of the estimated

potential. One of the reasons for this short-fall is the provision for exemptions on residential

68 Potential GT at 2011 was Shs.105 billion plus Shs.6billion development levy less Shs.34 billion compensation.


property for owner occupied residences. The exemption did not provide a new avenue for

LGs to fund services that were deemed to be funded directly from this revenue source in

these areas. The cost of property valuation and the subsequent post valuation process

costs have been unaffordable by most Municipalities and Town Councils.

7.4 Findings of the Study related to Local Revenue Performance in LGs

The poor performance in local revenue is due to apathy by LG management to take up

the new revenue administration initiatives and also due to the exemptions for LST and

property rates that have reduced the tax base to a significant degree. There has been a

growing attitude of resisting the payment of taxes with increasing dependency on Central

Government to finance local service delivery. This has also been perpetuated by several

uncoordinated political statements. There appears to be limited political interest in the

mobilization of local revenues.. Further, there is no recognition for those who pay LST as

was the case with GT through issuance of a tax ticket. Moreover, there are wide

exemptions under LST especially for commercial farmers. This study found the following key

challenges that have resulted into low revenue administration effectiveness.

a) Low collection effectiveness resulting from administrative capacity gap.

Whereas the LGFC projected a revenue potential of Shs.334 billion69 by the end of 2010/11,

local revenue collections were only Shs.164.223billion reflecting only a 42.5% efficiency

level. Actual average annual revenue growth is 5%. It is therefore not surprising that the

target of shsh334 billion was not attainable without serious action on administrative

reforms. Due to limited financing, LGs lack the capacity in terms of technological know-

how and physical equipment to collect and store credible data on their revenue sources..

Table 7.5 below shows the trend of the past three years and draws a comparison with the

potential and revenue collection effectiveness.

Table 7.5 Revenue collection effectiveness (billions)

Source

2004/05

(last year

of GT)

Actual

2008/09

Actual

2009/10

Actual

2010/11

Estimated

potential

2010/11

Effectivene

ss 2010/11

(%)

Local Service Tax

3.838 9.195 10.574 106.1970171 10%

GT (Net) 60.04 - - - - -

Local hotel Tax

0.984 1.496 1.720 6.459 27%

Property Related

24.936 45.598 52.438 106.718 49%

User Fees

/Charges 33.153 39.924 45.912 72.382 63%

Business Licenses

9.171 13.369 15.374 36.056 43%

Other revenues

46.626 33.222 38.205 106.796 36%

Total

118.709 142.802 164.223 434.603 38%

Source: Consultant’s Data Analysis and Projections, 2012

69 This study projects a minimum 434 billion since new taxes are meant to replace GT. 70Includes estimate for replacement of GT. LGFC estimate excludes the amount. This explains the difference between Shs.334 billion and

this amount.


Most LGs do not possess a standard and updated taxpayers register and as a result, they

are not able to accurately estimate revenue potential and targets as voiced by a

respondent during the study:

“For Local Revenue, a question that we have not been able to emphatically answer is

“How much should we be able to collect and from whom?” Have we exhausted all the

potential sources? Without answers to these questions, we are always going to fall short”

CFO Entebbe Municipality

In cases where attempts have been made to contract out revenue collection, there are a

limited number of companies with requisite proficiency and capacity in revenue collection

to support revenue collection and administration in LGs. In most cases, contracted

companies are unable to perform as expected on their contracts leaving LGs with a

burden to redeem these contracts. On the other hand LGs do not have appropriate

capacity to determine the respective revenue potential before contact awards, poor

enforcement mechanisms and significant political interference especially during awards of

tenders. These handicaps have tended to impair revenue realisation and accountability.

b) A constraining legal framework which stifles capacity to expand the tax-base

In most LGs that were visited, it was evident that either due to wide ranging exemptions,

susceptibility to political involvement, and the language or provisions of some laws; LGs

have not been able to take opportunity of the changing economic environment to

enhance revenues. For instance, the Act relating to royalties is not clear on rights of LGs.

LGs are usually unaware of the volumes and values of extractions, are not involved in

environmental issues that are likely to increase future expenditures or undermine revenue

initiatives. The Trade Licensing Act 2000 and Statutory Instrument No.54, and guidelines

have tended to base their rates on model urban areas, which has caused difficulties in

implementation of rates in some under privileged rural LGs. There is not sufficient

consultation or discretion for LGs to set suitable rates appropriate to their jurisdiction. An

example for this point is illustrated below:

Most of the trading licenses and permit rates provided for LGs are benchmarked on

Kampala Capital City realities which are not consistent with realities in LGs. We advise that

LGs be given discretion to set levels of payment to widen the tax base at lower rates.

District Finance Officer, Oyam

c) Low revenue base elasticity

Bases of revenues such as LHT, LST, property rates may depend on the rate of economic

development within a given LG and yet the capacity to promote or guide the direction of

economic growth initiatives is outside the domain of LGs. LHT in rural areas depends on

the hotel develop industry which LG may not have immediate ability to attract even in

urban areas since LGs do not generally own land. Furthermore, there is currently a

contracting elasticity of the revenue base with the increasing establishment of new LGs. As

new LGs are created the old LGs lose revenue that goes to areas no-longer under their

jurisdiction. The general impact of the reduction of the tax base or the shifting of the tax

base is illustrated under table 7.6 below. The revenue bases are largely business and

property related revenues based in urban areas. A new district establishes at least one

new self-accounting town council and in many cases the viable county agitates for

separation. Cases in-point, are shown in the table below.


Table 7.6 Revenue base shift after split

Name of District 2004/2005 2007/2008 2010/11

Mbarara 2,198,372,201 705,496,44872 561,144,805

Kabarole 422,544,81373

335,792,884

Kyenjojo 1,054,303,544

424,911,83874

Source: Study analysis, LGFC data.

d) Low staff capacity in LG local revenue function and contractors

Staff quality and strength remains a challenge for revenue administration in LGs. There are

generally low levels of trained and motivated staff to effectively operate the LG revenue

function. In the LGs visited under the study the LG Chief Finance Officers - have to grapple

with these limitations to manage the day-to-day activities of the revenue collection

process. Low recruitment of parish chiefs and mobilisers are an additional handicap. It

constrains sensitization campaigns to educate the residents on the importance of paying

fees and taxes - a key aspect of revenue mobilization. Furthermore, due to inadequate

logistical support and equipment, LGs are unable to undertake mass sensitization

campaigns. Related to this, some firms which have been contracted by the LGs do not

possess the requisite capacity to collect revenues. Some have been charged with

colluding with taxpayers to reflect taxable stock that is less than they actually possess. Poor

data management makes it difficult to assess the revenue potential of contacted out

sources, which makes enforcement a challenge and increases the risk of abuse.

e) Low investment in revenue enhancement activity

In the majority of LGs and especially the new LGs (created after 2005), their revenue

management sections do not have logistics in terms of basic transport facilities for revenue

administration activities, revenue stationary, data management equipment and

facilitation for staff.

f) Inability of LGs to link local service delivery and collected local revenues

The current low level of service delivery has created a perception among communities

that LGs are not accountable to them which has worsened their attitude to the LGs and

reduced their willingness to pay taxes.

g) Poor business infrastructure constraining collection of fees and licences

In some cases LGs find enforcement of tax payment challenging due to the nature of

infrastructure. For example, some people operate businesses in their homes or private

apartments; most rural markets have no enclosures and this may complicate enforcement

of payment and provided opportunities for evasion.

h) Generally Limited Revenue Potential

The current local government tax structure predominantly provides for direct taxation on

residents, business and wealth. The predominant revenues categories include:

• LST which targets personal incomes especially from employment;

• Property taxes levied on commercial and industrial property and exempts owner

occupied property;

• Production based taxes such as agriculture Cess, trading licenses and professional

business permits; and

• Consumption based taxes such as LHT, market dues and rent.

72 Splint into Kiruhura,Insingoro, Mbarara 73 split into Kyenjojo, Kabarole 74 splint into Kyenjojo and Kamwenge


The Local Government Service Tax, Commercial and Industrial Property Tax have a

reduced resource base because of levels of income in rural communities. LHT for rural

areas is not a viable source since rural areas generally do not have hotels, so the LHT is

uncollectable; The LST is generally on formal salaried employees who are mainly in the

urban areas. Nearly all property in rural areas is exempt from property tax, allowing for a

few properties in rural growth centers who will usually be reluctant to pay due to

perceived political action and level of economic activity. There is no significant

commercial activity in rural areas and the opportunity for revenues from business permits is

low. This study estimates the revenue potential at about Shs 600 billion by 2015/16. It is

unlikely that this target will be attained in unless appropriate measures and reforms are

undertaken.

Table 7.8 Projections of performance with increased effectiveness( Shs. thousands)

Source

Actual

2010/11

Estimated

potential

2010/11

Impact of

reforms

2013/14

Impact of

reforms

2014/15

Impact of

reforms

2015/16

Local Service Tax 10,573,803 106,190,657 115,860,705 122,204,986 124,425,485

Local hotel Tax 1,719,933 6,458,836 2,579,900 3,353,869 3,689,256

Property Related 52,437,636 106,718,188 78,656,454 94,387,745 103,826,519

User Fees /Charges 45,912,138 72,382,375 68,868,207 82,641,848 90,906,033

Business Licenses 15,374,229 36,056,421 23,061,344 27,673,612 30,440,973

Other revenues 38,205,050 106,796,136 57,307,575 68,769,090 72,207,545

Sub total 164,222,790 334,602,613 246,334,184 295,601,020 325,161,122

New sources

174,509,040 191,959,944 211,155,938

Total 164,222,790 434,602,613 520,843,224 587,560,964 636,317,061

Source: Study Analysis based on LGFC Database 2012

As shown by the table above, the performance in collecting current revenues is on

average below 50% of the potential. Introducing new sources of locally generated

revenues would be creating an increased administrative burden on LGs without an

assurance of increased collection. The current focus should be on improving effectiveness

and efficiency in current sources. However, new financing options should be identified in

the medium term. Since the current estimated service delivery recurrent financing gap is

estimated at Shs.6 billion for each district, (see Chapter 8 section 8.5.2), these taxes will not

be sufficient to close that gap unless the overall collection efficiency improves to about

90%.

a) Low levels of efficiency in Tax Administration

The administrative efficiency of the local governments has been generally weak for many

years. This has resulted in low levels of collection efficiency. Any program to increase LGs’

revenue should focus on the strengthening administration including the provision of

funding for revenue enhancement plans, specific action on politicians and improve

accountability systems. While efforts have been made to document the reasons and to

promote best practice examples, the overall administrative efficiency appears to have

declined further. Some of the reasons for this deterioration are:


The increase in the number of local governments has resulted in units with low staffing

levels, Soroti District staffing level is at 44%as of the end of 2011, and with staff who

are not well qualified and/or trained;

Limited enforcement of the tax obligations;

Limited use of technology and limited management emphasis on developing and

maintaining effective data bases (manual or computerized) of potential tax payers;

and

A growing resistance to paying taxes because of the decline and low visibility of services

being provided by the government.

a) Little connection between taxes and services

As revenues available to local governments have declined, funds are not available for

proper operations and maintenance of health clinics, roads, drainage systems, etc. The

creation of new local governments has often not considered the filling of the staffing

structures in the short term. For a number of LGs the staffing levels are too low to support

the revenue function resulting in high collection inefficiencies, inadequate funding for

services, and core activities such as support in sensitization, monitoring and supervision of

services to ensure value for money. Consequently, due to the lack of direct improvements

in services associated with local taxes, communities become more unwilling to make

required tax payments as there is a diminished relationship between services and taxes

paid or payable.

b) Limited Downward Accountability

The dominance of transfers from the centre in financing service delivery and emoluments

for the political leadership has meant that accountability is generally upwards to the

centre. With communities receiving most services free, there is little interest in demanding

accountability in quality of service rendered. This low interest in the utilization of funds by

communities has led to low ownership of programmes and therefore less support in tax

payment. Furthermore, limited local revenues make it difficult for LGs to fund processes for

oversight and accountability resulting into the risk of poor service delivery which feeds into

the cycle of low willingness to pay taxes.

c) Lack of awareness regarding tax payers’ responsibilities

Just as there appears to be an increasing trend of local officials looking to the centre to

solve their problems, so too is there a tendency of communities to look to government to

solve theirs. While governments have a clear responsibility to deliver the services

requested by the constituents, no government can meet these needs without the

participation of the communities. Communities need to recognize that they too have

responsibilities to pay their fair share of taxes, to demand honest and accountable local

governments, and to support their governments by co-funding many services through user

fees and/or voluntary contributions.

d) Poor Billing and Collection systems

For the reasons cited above, local government billing and collection efficiency is generally

poor. Some of the specific reasons for this level of inefficiency are:

New and poorly trained staff;

Lack of attention given to developing and maintaining registers for tax payers;

Political activity leading to a worsening of attitudes towards payment of taxes, and

Lack of awareness on the part of the tax payers.


7.5 Recommendations to enhance the significance of Local Revenues

Local Revenue performance is below estimated potential, whereas the costs and service

needs are growing resulting into critical service gaps. The drop in the level of service

delivery has a negative impact on the level of willingness by residents to pay taxes. The

service deficit impact is further exacerbated by increased rural urban migration which has

resulted into a large class of urban poor.

The gap in financing local service delivery cannot be eliminated solely by increasing

revenues. A more reasonable approach would consist of a combination of increases in

fiscal transfers, increases in own-source revenues, increased community participation in

payment for specified services and a reduction in the cost of the overall local government

system. In implementing the recommendations, the LGs should be able for identify the

quick wins which involve minimal administrative and political costs. The support of the

LGFC will be important in order to actualize these recommendations. The reforms should

be led by LGs rather than through directions from the centre. Revenue enhancement

should have an integrated approach combining:

i. Revenue administration reforms,

ii. Expenditure rationalization (waste minimization) and better accountability; and

iii. Identification of new revenue sources.

This study presents recommendations that can enhance Local Revenue in the short to

medium term under the above themes.

7.5.1 Revenue Administration Reforms

a) Review Legal and regulatory framework

Minimize exemptions on LST and property rates. Rates on owner occupier properties

should not be at more than 5% rateable value. It is proposed by this study that the

Government should set the lowest payable LST rate at Shs.20, 000 (so that those

below that level can be exempted due to a low income status), while retaining the

maximum payable at Shs.100,000. In addition, the cost to collect Shs.5,000 from

salaried persons and others makes the proposition unviable. The guidelines from the

centre should allow more discretion to LGs on exemptions, assessments and

enforcement. Avoid a common solution for all. The tax tribunals should be fully

revamped and be more representative.

Since all residents demand services, all must contribute to the local government

budget. Exemptions on property rates should be reviewed with a view to bring more

tax payers on to the tax registers. Review exemptions and criteria to define

commercial farmers. Reduce tax bands and exempt persons with income below one

million shillings per year and allow LGs to fully be in charge of enumeration and

assessment. In same way the following are proposed to ease exemptions in LST:

i. Restore the issuance of GT Tickets for LST since payers take pride in owning them

as evidence of payment;

ii. Review the markets Act to allow the private sector to develop and operate

markets in partnership with LGs so as to promote local economic development

faster; and

iii. The legal framework regarding access to royalties is not providing enough

safeguards even though the estimated potential from this source is estimated at

Shs.16.5bn per year.

LGs should be permitted to collect revenues from fishing and forestry as was the case

previously by reviewing guidelines for access to royalties in the mining act, the


forestry act, and the electricity act. For instance, the sharing of specific revenues

should be done systematically so that LGs are not left with difficult to collect taxes.

Lessons can be learned from China which allows the sharing of VAT at 25% to LGs,

natural resource extraction 20% to municipalities holding the resource. Another is

Thailand that shares transfers at least 26% to LGs. For Uganda a sharing mechanism

may be worked between NFA and Fisheries department. Fisheries revenues

constituted a significant portion of local revenues for Island districts and others which

neighbour various lakes.

b) Revenue data base management

Use smart phones to take pictures of all commercial and industrial properties, record the

address of each and attach this information into the taxpayer

identification/registration system.

Introduce Integrated Financial Management Information Systems (IFMIS) in the larger LGs

to utilize the revenue module in the package and develop a data base (registry) of

all taxpayers. The smaller LGs without an IFMIS should be provided and trained on

the use of a standard Excel based taxpayer identification/registration system. This

register should populate the taxpayer registration system with information such as the

names, professions, estimated property value, and payment history. In addition,

there should be a mechanism that utilizes the taxpayer identification/registration

system to transfer taxpayer information into the billing and collection system for the

preparation of the bills. To ensure the success of this process, a specific allocation

should be earmarked to fund this process with project management oversight by the

LGFC and MoLG. Wakiso district is already implementing Revenue software which

provides automatic demand notes and individual account statements

Support development and maintenance of revenue data and systems and other

logistical capacity for overall administration. Table 7.7 below shows a breakdown of

how this support could be distributed in support of revenue administration. .

Table 7.7 Financing initiatives to improve tax administration in LGs

Number Rate Total

LLGs 1,532 10,000,000 15,320,000,000

Districts 111 2,000,000 222,000,000

Municipalities 22 2,000,000 44,000,000

Motorcycles 264 15,000,000 3,960,000,000

Totals

19,546,000,000

As show in Table 7.7 a total one-time seed funding of Shs. 19.5 billion. The fund will be

spent on revenue supervision by both elected and appointed officials, data base up

dates, training revenue staff in assessments, enabling revenue enforcement, and the

computerization of revenue departments.

c) Tie Tax Collections to Service Delivery

The demand for services has increased faster than the rate of revenue growth causing

serious service delivery distortions at all levels. On average, own source revenues at

3% of total budget are insignificant to create a recognizable impact without support

of transfers. In the light of the above, it is imperative for Government to implement

the provision of the Local Government Rating Act, section 37, requiring that a

special account for revenues from rates be on a special account and that at least


75% of property rate collections be used for service delivery and widely publicize the

implementation of the legal provision.

d) Billing and Collection Efficiency

Make use of standard billing and collection ratios to monitor the efficiency of the

various LGs and monitor their performance during the Annual Performance

Assessment.

Establish the lowest payable LST at Shs. 20,000 and a maximum of Shs. 100,000 and

allow for instalments even from the local communities. Allow LGs discretion and

power to assess LST. GoU should ONLY legislate that persons with earnings below

Shs.one million (1.0m) a year should be exempt from LST. LGs will then identify and

assess according to guidelines especially with respect to assessment values.

e) Strengthen Enforcement

A system of transparent penalties should be imposed on all taxpayers for late payment.

Establish a unit within the District Court for the expeditious processing of delinquent

payments of taxes and duties.

LGs should be given enforcement powers similar to those of URA, for example powers to

attach property of defaulters and bank accounts.

Establish a revenue enforcement section to replace the former local administration

police.

There have been various studies which proposed reforms in LRRs over the last decade

but there appears to be little interest in enhancement of revenues. The action to

directly fund property valuation in urban councils was a one-time event which was

not followed up, resulting in low collection efficiency of property rates. To many

urban councils such as Mpigi Town Council the failure to collect the property rates

was due to lack of funds for follow up on community sensitization and other related

collection costs including enforcement.

f) Identify Best Practice Examples

Under the leadership of LGFC begin to document examples of best practice concerning

tax administration, billing and collection, enforcement, etc. in the local government

system and disseminate them for use of LGs.

Institute a mechanism that rewards the best taxpayers in LGs annually.

g) Sensitization Campaign Regarding Communities Responsibilities – Change Management

Develop a revenue enhancement communication strategy under the leadership of

MoLG and LGFC. Under this strategy, develop bulletins of standard information to

support efforts by the LGs to sensitize their communities regarding the financial

constraints being faced by the LGs and the importance of communities and

individual citizens assuming greater responsibility for local services.

h) Address the challenge of political actions that frustrate revenue collections

Political campaigns have often told people that government will provide all services and

they do not need to pay their taxes. There should be a deliberate effort by CG to

convince politicians to not make any actions which may frustrate collection of local

revenues. The creation of new LGs does not appear to consider the issue of revenue

sustainability and support for minimum service standards by the Central

Government. There is no agreed minimum standard for infrastructure. The lack of a

specific fund to sustain any new district has often resulted into a decline in service

standards in the short and medium term.


Exemptions on LST and property rates are responsible for a significant portion of the

revenue shortfall.

i) Other general administrative and policy measures

Implement immediately section 12 of Local Government Rating Act which allows for

mass property valuation since costs will be minimal with a big impact on revenues

especially in urban areas.

LGs should begin to collect revenues from fishing and forestry as was the case previously

by reviewing guidelines for access to royalties in the mining act, the forestry act, and

in the electricity act. For instance, sharing of specific revenues should be done

systematically so that LGs are not left with difficult to collect taxes.

Consider establishing a small unit within the District Court for expeditious prosecution of

cases involving risk of delinquency of payment of taxes and fees.

7.5.1 Expenditure Rationalization to avoid waste

a) Set up a Revenue Department

Each local government should establish a revenues department. A revenue matching

grant based on achievements above targets should be provided. Packages of

supply driven training programs on various aspects of LG revenue management

should be developed and made available to the LGs through various local pre-

qualify local training providers. To support this effort, the CG should include provision

in the annual budget for funds to implement this training programme.

b) Support Contracting-out

Explore ways to reduce the overall cost of the local government system. One option to

be studied would be to make systemic use of local private operators for services

such as solid waste collection and transport, the management of landfills/dumps,

road maintenance, street cleaning, etc. By contracting out these services, local

governments would become responsible for the delivery of such services rather than

doing it themselves. Further, making use of local contractors would strengthen the

local business communities by providing them with a steady stream of work while

also enabling local governments to reduce the size and expense of the current

system.

c) Earmark property rates revenues

Ensure that section 37 of the Rating Act requiring that 75% of proceeds are invested in

the area of tax origin is implemented.

7.5.2 Proposed New Revenue Options a) Property Service Tax

Rural LGs should introduce a Property Service Tax [PST] by creating a bye law to assess all

residential properties exempt under the rating Act. The amount should range from

Shs.30,000 to Shs.100,000 per year payable on a quarterly basis. Respective villages

should be allowed a percentage of collection so that they support the collection.

The retained fund should be reflected in village priority programs. This measure

should be subjected to the provisions of the fifth schedule part IV section 13(0) of

Cap 243.

b) Community Contribution towards Service Delivery


Community contributions towards service delivery, like health centres, water and primary

education should be introduced. LGs should be given discretion to levy a minimal

fee at service points so that the service is owned, improved and to minimize waste in

usage of drugs and of the other facilities. The contributions may range from Shs100 to

1,000. Discretion would be given to LGs to arrange for accountability issues and

management of this arrangement. See section 8 on details of this proposal.

c) Issuing of Municipality Bonds

Introducing municipal bonds will promote more transparency and accountability since

the underlying conditions for qualifying require specified accounting and reporting

standards.

d) Solid Waste Management Tax

A solid waste management tax should be introduced in Municipal and Town Councils to

be assessed by respective LGs. A maximum allowable tax may be determined by

the LGs through a consultative process75.

e) Introduce a Residence Tax

A residence tax on permanent residential houses of Shs.10,000 per year should be

introduced. This source alone would generate about Shs.30bn from the

approximately 3 million houses in the country.

f) Public Private Partnerships and Local Economic Development

Promote more application of Private Public Partnership strategies to raise resource for

service delivery while at same time earning revenues. Development of markets,

vehicle parks, public toilets, health services, education services are attractive for this

strategy. There should be a concerted effort to promote local economic

development (LED) strategies by increasing the level of discretionary funding and

support for revenue generation. LGs would need to be supported to implement

projects under a public private partnerships platform for engagements in markets

development, leisure parks, and car parks to both raise revenues and provide a

service. Local economic development (LED) programs should be appraised and

directly supported by Central Government.

In conclusion, it is recommended by the study that reforms are gradually implemented

starting with the implementation of best practices and administrative reforms followed by

those that require changes in legal frame work and finally new initiatives. Any reforms must

be followed by measures to increase accountability of both revenues collected and

expenditures. There are already many sources of revenues which are under performing

including the new LST and LHT. New sources will put more strain on both the LG

administration and community costs and the likelihood of increased political action. The

proposition for wide ranging new sources is not attractive at the moment.

The general poverty index is still depressed. Any new source of LG revenue is likely to

increase the burden on the poorer elements of the communities and should be avoided

until the overall tax administrative capacity of the LGs improves. New taxes are likely to

have low political acceptability, require new administrative procedures and may be costly

to manage in the initial stages. Consistency in implementation will result in sustainable

revenues; however, the Centre must take the initiative to mentor reforms and LG staff

involved in the process. For best results there must be an approach that combines

administrative reforms, expenditure rationalization, accountability and identification of

75Hoima Municipal Council is charging Shs.5000 per house hold per month, and has been successful after sensitization and consultations.


new revenue sources. The overall success will depend on level of involvement of local

governments and less dictation from the centre in order to create ownership of the

revenue instruments. Finally, sector ministries should develop service delivery standards

which are cost based, and provide direct funding to districts so that there is equalization in

basic service provision. The equalization grant should respond to service delivery gaps.

.


8 LOCAL SERVICE DELIVERY GAPS

8.1 Introduction

The decentralization of frontline services, including, among others, delivering basic

education, primary health care, agricultural advisory services and rural infrastructure

(roads, water, etc.) development to local government units is granted by the Constitution

and supported by the Local Governments Act (Cap243). In devolving these services, the

Constitution intended to bring them closer to the people for whom they are intended, to

improve their programming, delivery and reporting. The Constitution also spells out the

framework for financing these service mandates to enable LGs to effectively deliver on

them.

This Chapter presents a synopsis of the status of services delivery and the delivery gaps

and is drawn from field visits undertaken during the study. In 2007/08, MoLG commissioned

a study on “Minimum National Standards and Cost of Service Delivery for Activities under

the Jurisdiction of Local Governments” to determine the cost of delivering services in a LG

based on standards provided by sector ministries. Building on this study, this Chapter

estimates service delivery financings gaps focusing primarily on the management

functions of LGs and service delivery units using health and education as case studies.

This is not an exhaustive costing exercise but one intended to indicate the extent to which

service delivery is underfunded.

8.2 Service Delivery architecture

The mandate for delivering front line services is assigned to local governments -

elaborated under Second Schedule of the LGA (Cap243). In implementing these

mandates, LGs have responsibilities for planning, supervising and accounting for

implementation of these services. In delivering these mandates, LGs use a series of

strategies here below:

Special service delivery units; using special units under the control of the local

government or in collaboration with the private sector or NGOs. This is the case for

schools and health centres;

Units directly under the management of local government; this is the case for

community based services, water delivery, forestry, environment, natural resources,

and agriculture based services among others; and

Outsourcing or contracting; within the existing policy, local governments are

required to contract for road construction and maintenance services. Also, in urban

areas, water supply is undertaken by NWSC.

Many services are also undertaken in collaboration with local communities; water

committees help supervise water points, school management committees work with the

LG to supervise primary education.

The Constitution (Article 191 -193) also lays out an elaborate framework to finance LGs

responsibilities for delivering services. Financing is through a combination of sources but

primarily through raising own revenues and using grants transferred from Central

Government. The level of grants is established through the national annual planning

process. Central Government grants are transferred from the national budget using the


release system set-up by MoFPED to each LG for purpose of financing services. LGs will

further transfer appropriate portions of the grant to service delivery units – schools, hospitals

or to lower local governments depending on where the service is executed. In recent

years, Central Government began the practise of transferring financing directly to

beneficiaries through a method of direct payment. These transfers are subject to LG

advice. Accounting mechanisms requiring service delivery units to report to LGs and in

turn, LGs to report Central Government on expenditures under these grants, have been

established.

8.3 Major issues for Service delivery units

There is wide spread concern about the state of local services delivery. Poor performance

in services delivery has been attributed to the level of financing and under-staffing76, and

weakness in processes and systems for delivering financing for these services77. These

aspects are treated under separate Chapters. This section focuses on issues and practices

that affect efficiency in management and accounting for services particularly at the level

of service delivery units. These issues are derived from interactions with service units in the

sectors of education (primary schools), health (health centres), water (water offices and

units) and roads (road implementation units). Many of these are generic enough to be

applied to other sectors.

8.3.1 Staffing Staffing emerges as a major issue for service delivery units. It has three elements:

a) Staff structures in most LGs are not filled and have many officials in acting capacity.

This is true particularly in the case of health centres across the districts visited. The

situation is better in primary schools as the “one class one teacher” policy appears to

have responded better to local needs. However, because the head teachers are

considered as part of teaching staff, they are often stressed as they cope with

responsibilities for administration and teaching;

b) New districts take away staff from existing districts which complicates the staffing

issues further. Two years after its creation, Namayingo’s structure is 19% filled; critical

staff for Soroti district was split with Serere after its creation. Many of these staff

commute from Soroti to Serere on a daily basis which limits the time they dedicate to

their work. A similar situation is recorded in the case of Oyam; and

c) Some LGs, particularly rural LGs or those in hard to reach areas, are failing to attract

and retain staff. Even where LGs have offered significant incentives, they have still

not been able to attract staff they desire. Kalangala district, after running 2 adverts

in 2010, they were not able to attract and successful enlist a candidate for the

position of District Health Officer. They offered generous incentives; a top up on the

salary of 50%, a house and a car. The candidate still left after one week. The high

turnover of health staff is also attributable to absence of medical equipment and

facilities which frustrates professional health workers even in seemly well off LGs such

as Wakiso District.

Box 8.1 illustrates some staffing issues found from the field visits. These gaps in staffing are

collaborated by previous assessments and reports including the 7th Joint annual review of

Decentralisation and the Health audit report of 2010.

76 7th Joint Annual review of decentralisation, February 2011, Section 5.2 77 Technical note on the review of LG financing, 2011


Box 8.1: Illustration of staffing constraints in Local Governments

Bwendero HC III Kalangala78 (main island) has only 6 (including 2 support staff) of 19 staff

in the structure. The district has been unable to attract the right cadre (Senior Clinical

officer, or Clinical officer) to head it. It is currently headed by an Enrolled Nurse. The lack

of critical staff In Soroti at Diana Memorial Health Centre IV has increased average time

an outpatient has to spend at the facility to nearly 8 hours.

8.3.2 Funding for service delivery

a) Effects of funding levels

Financing for local service delivery is low and contributes to the poor service delivery. As

Table 8.1 below indicates, the primary source of funding for service units that were visited is

government transfers. Because districts’ revenues are generally small, they hardly

contribute to the running of these services. Government contributions are low and have

not been adjusted to meet the rising cost of services in the past five years or more. The

second issue concerns the near lack of funding for O&M. Infrastructure that has been

developed for services over the years is not being properly maintained and thus the useful

life of these assets is reduced.

Table 8.1: Funding to selected services and constraints

Grant Allocation Scope to finance Constraint including on O&M

UPE Under 7,000

per child per

annum

reducing to

about

Shs2,000 per

term

35%: instructional / scholastic

materials

35%: co-curricular activities

10%: school management

(10%)

10%: contingency

No special provision for O&M

but could benefit from

contingency

Low funding has led to

reducing expenditure on co-

curricular activities and no

allocations in general to O&M

leading to rapidly degrading

school infrastructure

PHC HC II in Pader

gets an

average of

66,000 per

month. HCIIs

in 14 districts

get below

100,000 per

month

20%: District administration,

management and support

services

80%: Allocations to HCIV, III, II

in ratio 4:2:1 to be used for

administrative expenses,

food supply, medical and

office equipment, O&M,

utilities, cleaning services,

goods and supplies, training

costs, payment of interns,

outreaches, monitoring,

supervision and reporting

and property costs, medical

and office equipment,

O&M, Utilities, cleaning

services,

O&M in the list of items eligible

for funding. In practice, due

to low funding, O&M hardly

gets any allocation leading to

rapid deterioration of the

condition of infrastructure

78Kalangala, and possibly all island districts, have unique constraints making it difficult to attract and retain staff


Box 8.2 presents examples of experiences identified arising from the impact of low funding

levels on service delivery.

Box 8.2: Illustration of the impact of low funding of service delivery

Due to limitations in funding for co-curricular activities, Wigweng Primary School in Oyam

Town Council has been forced to drop out of sport competitions and music, dance, and

drama activities for which the school was famed for years.

At Ambalal Primary School in Lira classroom blocks constructed under the SFG grant only

10 years ago have completely lost the cement floor, windows and have poor quality

blackboards a factor pointed to shoddy work done by contractors.

Picture 8.1: A maternity ward at Kalangala –Bwendero HC II in a state of disrepair

At Mihembero Health Centre II in Bwijanga Sub-county Masindi district, much as

attendance of patients at OPD has risen from 3,114 in 2008/09 to 4,822 in 2011/12 (an

increment of 55%), the funding allocation has only risen from Shs.2,266,120 to

Shs.2,859,000 (an increment of 26%) over the same period.

No maternity services and/or laboratory services are provided in Kalangala – Bwendero.

Maternity beds were found unattended and breaking down. Mothers have to travel at

least 15 kms to the HCIV in town. The same situation exists on the other islands; Mazinga

HC III does not offer maternity services, accordingly, mothers are often advised to move

to Entebbe at least 3 months prior to birth where they can receive maternity services.

No laboratory services in Diana Memorial HC IV. Prescriptions for many of the diseases

(for example malaria) are based on assumptions. Communities, worried about the stock

outs, are exploiting this gap and often – flocking to the HC when drugs arrive and

pretending to be sick so they build their own stock of drugs which they can use in times

of stock out.

Immunizations are not carried out in accordance with official schedules. In Kalangala,


immunization is carried out on quarterly basis and not monthly. Most of the financing is

used up in the high travel costs across the islands. For example, at least 200 litres of fuel

is required to move across the 17 islands being served by Mazinga HCII.

Picture 1: Maternity ward in Namayingo

Oli Health Centre IV is a very critical health unit in Arua Municipality but currently it

continues to refer patients to Arua Regional Referral Hospitals due to lack of ARVs. In

Kiruhura District, the largest Health Unit, Kiruhura HCIII has been elevated to HC IV with

works on-going to add an operational theatre to the unit. However, the health unit lacks

electricity and is therefore unable to store blood, maintain electric equipment (like

refrigerators and heaters) and faces serious drug stock outs for essentials like Septrin and

key antibiotics. The health unit is serving about 13,000 patients annually (about 1,021

patients monthly) has only one medical doctor and 3 nursing assistants who are clearly

stretched by the demand for care. Limited allocations at this unit have made it hard for

it to cover essential bed repairs, and maintain most of the infrastructure stock.

b) Contributions by local communities

Community contributions to local services delivery are encumbered by existing policies.

Where community involvement and contributions have been involved in services, local

ownership has been strengthened; investments are more amenable to local solutions and

sustainable. This is especially the case for water services delivery. In nearly all LGs visited,

there was a clear demand to have parents contribute to school feeding. As Box 8.3

indicates, in some LGs, parents are already contributing to the schools to ensure that their

children receive an adequate lunch.

Box 8.3: Parents contribution to school lunch

The lack of a provision for feeding of pupils has impacted negatively on UPE

performance even when a large section of parents are willing but not allowed to pay

an agreeable fee for school lunch. The general failure to provide feeding has tended to

undermine the quality of learning especially in the rural setting. Schools and community


leaders in nearly all districts, in a number of cases in conjunction with parents,

acknowledged some form of contribution (in kind or financial) asked of parents towards

school meals. In Moroto, parents are encouraged to contribute grain where they

cannot raise Shs.1,000 for each child per term. In Namayingo, parents contribute beans,

maize at an average of 3kgs per child per term. In Kapchorwa, it is 5 kgs per child per

term. In Mpigi and Kalangala, contributions ranged between 6,000 and 10,000 per term.

Contributions are used to purchase maize flour for porridge and firewood among others.

8.3.3 Financial management

The level of efficiency in financial management processes is a major issue. Sectors have

done well, in general, to provide guidelines for the application and reporting on grant

allocations. Disbursement procedures are becoming more transparent and in a number of

LGs, quarterly transfers are placed on notice boards. Most service delivery units visited had

good records for the application and reporting on funding, daily registration of patients,

daily drugs issues against names of patients and appropriate records for drugs in stores. In

addition, authorisation and control levels under education and health are fairly well

established. School management committees review the work plans and provide

authorisation for expenditures. The LG health officers sign off on the transfers to health

centres. Service units return reports to LGs providing accountability. Schools are often

assisted in this process by the sector sub-accountant. Service units however pointed to a

number of issues below:

a) Service units (schools and health centres) do not, in general, have annual plans or

budgets. The practise is to prepare expenditure plans following receipt of cash

transfers. These are then approved by school management committees. This means

they may find it difficult to recover the full cost of delivering services. This is limiting

their ability to manage optimally;

b) Delays in receiving funds which can take up to 6-8 weeks in some instances. This

delay includes time (usually take 2-3 weeks) for LGs take to process transfers to

service units once they receive funds from Central Government;

c) Primary schools would need to have their funding synchronised with the education

cycle. Transfer of UPE capitation should be received at the beginning of the

academic term and aligned to the period of the term. This would reduce the stress

Head teachers suffer as they seek credit to finance school inputs;

d) Heads of service units have limited knowledge of financial management. Although

the sector forms they use in reporting on financial transactions have been helpful in

recording and accounting for their resources, increased understanding of financial

management, including cash management, accounting and reporting would

improve the ability to manage their cash flows; and

e) Internal audit function needs better support. Most units reported that internal audit is

expected to review their transactions every quarter. In practice, internal audit visits

to service units are less frequent. The common practise is to examine transactions

after they are submitted to the LG. Service units do not always receive the reports of

the internal audit.


8.3.4 Procurement For a number of service delivery units, notably in roads, acquiring inputs (contracts) involve

large sums of money. These units are required to follow the public procurement process to

acquire these inputs. These units identified the lengthy procurement process as a

constraint to delivering services. For contracts exceeding Shs.50million, these units spend a

lot of time following up on their clearance with the Solicitor General as the Law requires. A

related issue is the inability for some of the LGs to attract qualified firms to undertake major

contracts particularly under roads often leading to poor results. In many cases the

contractors have low technical capacity leading to delays in completion of jobs which

sometimes result into money being returned to treasury at the close of the financial year.

8.3.5 Supervision Supervision of local service units is the obligation of the local government administration.

Most service units reported regular (often quarterly) supervision visits. The LGs also

confirmed the schedule of supervision visits however, for service units that are further from

the headquarters, the frequency of these visits is less regular. Limited visits are conducted

by Councillors. The main issues are often the funding to cover cost for these visits. Local

governments often rely on monthly reports by service delivery units that are often further

from the headquarters.

8.4 Gaps in Local Service Delivery Financing

The focus in this section for estimating the gap is based on the non-wage recurrent costs.

Costs for wages are given and are subject to policy. Development costs are financed

through special grants. Non-wage recurrent financing is critical for daily operations of

service delivery and is the focus of estimation below.

The estimation below uses the 2008 MoLG Study - “Study on Minimum National Standards

and Cost of Service Delivery for Activities under the Jurisdiction of Local Governments”

and budget 2011/12 data on LGs allocations and transfers. Data obtained during field

visits is also used to the extent that it is collaborated and reliable. The study is not a

detailed costing but one intended to provide an indication of the extent of the financing

gap in local services delivery. It is the recommendation of this report to commission a

separate study on the cost of service delivery to deduce a much more accurate financing

gap.

8.4.1 Estimated Cost of delivering services at District level In 2008, the Ministry of Local Government commissioned the “Study on Minimum National

Standards and Cost of Service Delivery for Activities under the Jurisdiction of Local

Governments” to provide a basis for determining realistic costs for financing local

government services. This report was the first attempt to compute the development and

recurring costs for a hypothetical (average) district using the minimum service standards as

specified by the each sector. The total wage and non-wage recurrent cost to provide

services for this average district in 2008 were calculated to be about Shs.34.9 billion. Table

8,2 presents the costs for service delivery, non-wage recurrent costs, as presented on page

53 of that report. The table also makes a projection of what those costs would have been

in 2011/12 if they were increased by rate of inflation of 5% per year.


Table 8.2: Current Cost of Service Delivery for a District Local Government (millions)

Sector (1)

Est. Non-

wage Cost

2007/08

(2)

Projected Non-

wage

2011/12

(3)

Adjustment based

on filled structure

factor =0.58

Education 1,909 2,320 1,346

Health 6,724 8,174 4,741

Works 4,194 5,098 2,957

Water 434 527 306

Production 3,412 4,147 2,405

Community development. 543 659 382

Lands 134 163 94

Administration 2,610 3,173 1,840

Total 19,960 24,260 14,071

In the table above, the figures in column (1) are obtained from the 2007/08 study by MoLG

and projected to 2011/12 – increasing by inflation factor (5%), in Column (2). The figures

under column (3) are obtained by discounting the Column (2) to 58% - the estimated filled

level of the structure. This tables estimates an annual non-wage financing requirement of

14,071billion for an average district

Using this approach, Table 8.3 presents the financing gap derived based on 3 districts:

Soroti, Luweero, and Arua districts.

Table 8.3: Estimated financing gap for districts (including towns) for recurrent non-wage

costs (millions)

Soroti Kisoro Arua

Projected

2011/12

Total non-wage estimated average needs 11,679 14,071 17,166 12,598

Average non-wage transfers* 2,637 3,003 6,321 2,593

Locally raised revenues * 448 157 468 1,055

Total discretionary 3,085 3,160 6,789 3,648

Funding gap 8,594 10,911 10,378 8,950

% Gap 74% 78% 60% 71%

Number of District LGs in similar class 80 22 9 111

National Gap

993,428

- The figures marked “*” are determined by dividing budget provisions, in the case of

transfers, and projections of collections in the case of revenues, by 111, the number of

districts

- The project non-wage figure of 12,598 is obtained as the weighted average of the three

districts taking into account the number of districts in similar class

In the table 8.3 above, adjustments are made to the non-wage financing requirements

based on the 2005 approved structure by district; Kisoro is considered an average district in

terms of its approved structure and so its non-wage requirements are equated to the

figure of 14,071bn in Table 8.2. Soroti district structure is 0.83 of that of Kisoro while Arua

district structure is 1.22 of Kisoro. Non-wage transfers are obtained from 2011/12 budget


provisions. Locally raised revenues are deduced by projecting actual collections by these

districts based on performance over past five years using data obtained from LGFC. This

model generates a national gap on non-wage recurrent financing (including

management costs) of about USHS. 993.4bn for 111 districts if one considered weighted

averages of gaps for the 3 districts

In the same way, the table below also estimates the costs of running an average

municipal council

Table 8.4: Estimated Cost of Service Delivery for an average Municipal Local Government

(millions)

Sector / Department

Estimated

2011/12

Wage

costs

Estimated

2011/12

Non-wage

costs

Estimated 2011/12

costs for Service

Units outside LG

mains administration

Total

Estimates

2011/12

Administration 378.6 1,388.2 - 1,767

Special Urban services - 375.4 - 375

Production 27.3 146.2 116.6 290

Health - 38.6 998.0 1,037

Education 57.6 180.3 1,640.1 1,878

Works 111.3 307.5 549.5 968

Water and sanitation - 25.2 50.3 76

Natural Resources - - - -

Community based

services 45.7 138.0 24.2 208

Divisions 238.0 643.7 - 882

TOTAL 858.5 3,243.0 3,378.6 7,480.2

Based on the table 8.4 above, the financing gap for 22 municipal councils is estimated to

be 58.9billion in 2011/12 as shown in the table below.

Table 8.5: Estimated financing gap for Municipal Councils for recurrent costs (millions)

Amount (millions)

Total Required (incl. urban services) 7,480.17

- o/w wage costs 2,525.94

- o/w non-wage operating costs 4,954.22

Average non-wage transfers - 2011/12 National Budget 3,865

Average projected LRR collections 939

TOTAL Revenues 4,804

Gap 2,676

% GAP 36%

Number of Municipalities 22

National Funding Gap 58,881


Table 8.6 below provides estimated gap in financing salaries covering all services for both

urban and rural LGs. To the extent possible, these figures have been deduced based on

approved structure or staff numbers and using salary rates for 2011/12. The financing gap

on wages is estimated at Shs252bn

Table 8.6: Estimated financing gap for Salaries based on 2011/12 financing levels(billions)

(1)

Amount

Required

(2)

Amount

Provided

(3)

Gap

(4)

% Gap

Education (Primary) 639.04 517.13 121.91 19%

Health workers 168.77 141.60 27.18 16%

Others (incl. LG admin, Secondary /

Tertiary Education) 391.44 288.03 103.41 26%

TOTAL 1,199.25 946.75 252.50 21%

Column (1) in the table above, the amount required for

- primary teachers is based on the ceiling of 139,699 teachers79 and assumption of

balanced mix between U5 and U6salary scales

- health workers in health centres is determined based on approved salary

structures for health centres II, III and IV and the number of health units as

provided by Ministry of Health

- salaries for LG administration are based on structure of an average district. These

also include salaries for District Executive Committees, and Speakers of Councils

- in the absence of data on ceilings for both secondary and tertiary, the budgetary

provisions for 2011/12 are assumed.

Column (2) in the table above, the amount provided is derived from the budgetary

provisions for 2011/12.

Assuming the derivations in tables 8.3, 8.5 and 8.6 above, the total recurrent financing gap

for local government services, including wage and non-wage costs, is estimated at about

Shs. 1,285,921 billions

8.4.2 Financing gap for management services

Management services are at the centre of delivering services. Management services are

defined to include operations of the LG for administration, planning, budgeting,

supervision, monitoring, reporting, accounting and auditing. Proper implementation of

these mandates will strengthen the delivery of services. In general, management services

are financed out of discretionary funding under the LG non-wage unconditional grant and

local revenue. Table 8.7 presents the cost of management services and projects and

generates an estimate for the financing gap.

79 Figure provide by MoFPED


Table 8.7: Estimated management cost financing gap for Soroti, Luweero, Arua districts for

recurrent non-wage (figures in thousands)

(1)

Average

HLG

('000)

(2)

Soroti

District

('000)

(3)

Luweero

District

('000)

(4)

Arua

District

('000)

(5)

Average of

selected

districts

('000)

Estimates for non-wage costs

Councils costs (allowances) 974,620 974,620 974,620 974,620 974,620

Operational Costs 1,579,420 1,639,701 2,623,537 3,001,800 2,421,679

O&M - Equipment 257,901 193,776 266,489 341,848 267,371

Maintenance of Buildings 68,540 91,705 157,168 218,215 155,696

Total required 2,880,481 2,899,802 4,021,814 4,536,483 3,819,366

Estimates for discretionary

receipts

Own Source Revenue 764,009 559,090 338,627 1,192,171 696,629

Un-conditional Grant and

others 696,680 603,191 920,250 1,656,438 1,059,960

TOTAL discretional resource 1,460,689 1,162,281 1,258,877 2,848,609 1,756,589

Estimated gap -1,419,792 -1,737,521 -2,762,937 -1,687,874 -2,062,777

Gap in % -49% -60% -69% -37% -54%

Table 8.7 estimates the cost of management services by combining costs related to

Council operations (including allowances and supervision costs), costs for general

administration including supervision, inspection and monitoring of service delivery by the

LG, and the cost for maintaining equipment and building infrastructure. The financing gap

is then determined by comparing the sum of these costs and the allocations under un-

conditional grants (non-wage), conditional grants allocation under other management

function, and projected levels of local revenues to be collected by the LG in the financial

year 2011/12. Using the average gap of the three districts (Soroti, Luwero and Arua) of 54%,

the national financing gap would be about 230bn for all 111 districts.

In the table above:

Management Services include costs for LG councils, administration and operations

of the departments. including inspection and supervisions;

Council costs are computed based on standard rates for allowances and assume

6 meetings of 2 days each in year;

Operational costs computed at 7/6 of wage for central administration and 6/4 of

wage for sector departments. These ratios are less that the standard ideal rates of

7/3;

Operational and maintenance of equipment computed at 9% of equipment value

provided in 2008 MoLG costing report;

Building maintenance computed at 2% of value of building infrastructure in the

2008 MoLG costing report;

Own source revenue is average estimate - 2011/12 for "average HLG";

UCG is the sum of UCG-nonwage and other non-wage CGs for administration

functions; PAF monitoring, IFMIS costs, DCS operations, board and commissions,

school inspection;


Projections for the 3 districts: Soroti (Column 2), Luwero (Column 3), Arua (Column

4), are obtained by applying the ratios of their approved structures to the average

district to the figures in column (1)

Estimates of discretionary receipts are sums of OSR and UCG from Form B of the 3

districts.

Table 8.5 applies this logic to all 111 districts using 2011/12 as the base year

Table 8.8: Projection of financing gap for management services for 111 districts (millions)

(1)

2011/12

(2)

2012/13

PROJECTED

Growth

factor

(3)

2013/14

(4)

2014/15

(5)

2015/16

(6)

2015/16

Receipts – all districts

Own Source Revenue 120,490 150,612 25% 188,265 235,331 294,164 367,705

Un-conditional Grant 70,491 75,587 10% 83,145 91,460 100,606 110,666

TOTAL discretional

resource 190,980 226,198

271,410 326,791 394,770 478,371

Estimated requirement 423,950 445,147 5% 467,404 490,775 515,313 541,079

Estimated gap

-

232,969 -218,949 -195,994 -163,984 -120,544 -62,708

% gap -55% -49% -42% -33% -23% -12%

In the table, figures for unconditional grant for 2011/12 and 2012/13 are obtained from

official allocations (approved / draft estimates). Own source revenues for the same years

are obtained by projections from actual collections for 2009/10. Requirements are

deduced by multiplying the gap in table 8.8(column 5) by number of districts. Columns 3,4,

5 and 6 are obtained by applying respective items to the growth factors. As provided in

the table, it is possible to reduce the financing gap significantly if efforts are put in to

improve local revenue collections – using the measures in Chapter 7, and if Government

accepts to increase the allocation under UCG by 10% in real terms over the medium term.

Further reduction in the financing gap can be achieved through efficiency measures

8.4.3 Gap in financing for selected services

This section presents estimated the financing gaps for UPE and health centres. The section

is unable to cover all services due to limitation in the data.

a) Financing gap for UPE schools

The estimation presented in Table 8.9below uses an average school based on MoES

database and compared this derivation with 3 selected schools with data obtained from

the field.

Table 8.9 estimates the costs of recurrent activities, excluding salaries and instructional

materials provided by Central Government, based on an average school. Important

elements in the computation are administrative and management costs, scholastic

materials including co-curricular activities, water and sanitation and costs for maintenance

of buildings and furniture. The financing gap is determined for 3 schools; Kichinjaji P.S, Soroti

MC, Nadunget PS in Moroto, and Bessania PS in Mpigi, based on data parameters


collected during field visits. The financing gap is generated by comparing the rate per

child derived as a result of the costing for each school and the present rate of 7, 000/=

used by Government. From this exercise, the financing gap ranges from 37% to 50% across

the schools. Assuming an average cost of Shs. 13,021, the funding gap becomes Shs.6, 021.

For a student population of 10,779,933 (based on the MoES census of 2011), the funding

gap aggregates to Shs.65billion under UPE.

Table 8.9: Estimated financing gap running selected schools

Salary rate

or estimated cost

for building

AVERAGE

SCHOOL

Kichinjaji

P.S.

Soroti MC

Nadunget

PS

Moroto

Bessania PS

Mpigi

Parameter used in

estimation

Enrolment 485 1,508 366 299

Teachers - U5 4,997,616 5 3 - 3

Teachers - U6 3,795,093 5 1 2 2

U7 - Upper 3,744,000

16

3

U7 3,264,000

6 18

Classrooms 14,875,000 9 20 8 7

Furniture - Classrooms 62,000 162 309 88 126.00

Furniture - Teachers /

Admin 100,000 11 22 10 9

Latrine Stances 1,299,048 12 14 10 10

Staff Houses 22,500,000 7 11 2 -

Administration block 14,875,000 2 2 2 2

Costing (UShs) Wage

43,963,545 98,275,941 66,342,186 33,815,034

Recurrent Costs

Admin. / Operations (% of

wage) 2% 879,271 1,965,519 1,326,844 676,301

Scholastic Materials 7,000 3,395,000 10,556,000 2,562,000 2,093,000

Water and Sanitation 500 242,500 754,000 183,000 149,500

Furniture Maintenance 2% 221,957 427,160 129,120 174,240

Building Maintenance 1% 1,959,732 2,954,367 877,405 427,405

6,698,460 16,657,046 5,078,369 3,520,445

Rate per child (Ushs) 13,811 11,046 13,875 11,774

Current Annual allocation

per child 7,000 7,000 7,000 7,000

GAP

-6,811 -4,046 -6,875 -4,774

% GAP -49% -37% -50% -41%

In the table above:

Parameters for average schools are derived from MoES database on school inventory

based on 2011 census;

Parameters for selected schools obtained direct from the school through - field work;

Teachers’ salaries are derived from the 2011/12 public service salary schedule;


Rates used for building infrastructure (classrooms, administration offices, latrines) are

standard rates used by MoES and provided in the 2008 cost study;

Non-wage administration costs, including maintenance of equipment) computed at 2%

of wage costs – in line with rates used in the 2008 MoLG Service cost study;

Scholastic materials - including co-curricular, are estimated at 7,000 per student per year;

Contribution to water and sanitation of Shs.500 is an estimate;

Maintenance of furniture computed at 2% of cost of furniture; and

Maintenance of buildings estimated at 1% of cost of buildings from the 2008 costing

study.

b) Financing gap for Health centres

Table 8.10 presents the computation for the service gap across health centres using

generic data provided by MoH (health centres inventory – 2011), and the 2008 costing

study and approved structures for health centres based on the 2005 restructuring report.

Table 8.10estimates the financing for each type of health centre; Health Centre II, Health

Centre III, Health Centre IV, by comparing the costs for operations, O&M and building

maintenance against the level of financing provided under PHC – non-wage grant. The

assumption is that all financing for health centres is provided through the PHC non-wage

grant. The computation excludes medicines as these are supplied directly by Central

Government. Gaps in financing range between 30% and 79% across the health centres

with health centre IVs experiencing the largest gaps. This computation places the total –

national financing gap at Shs.11.8bn.

Table 8.10: Estimated financing gap for Health Centres (figures in Shs. thousands)

Rate HC II HCIII HCIV

Annual wage estimate

22,821 72,784 219,557

Assume filled to 65% 65% 14,834 47,310 142,712

Building Infrastructures costing

146,537 507,671 1,074,251

Equipment Infrastructure costing

9,199 40,899 148,667

Estimated Costs (excl. medicines)

Operations (excl. medicines) 9% 1,335 4,258 12,844

Building infrastructure 1% 1,465 5,077 10,743

O&M equipment 2% 184 818 2,973

TOTAL

2,984 10,153 26,560

Estimated Gap

Current PHC average allocation

2,085 4,170 8,341

Gap

-899 -5,982 -18,219

% Gap -30% -59% -69%

Total Number of HCs

2,197 1,096 177

National GAP excl. drugs

-1,975,419 -6,556,392 -2,131,623

In the table above:

Annual estimates of wages are based on the structure for each HC using 2011/12 salary

rates;

The wage cost is discounted to 65% based on target to fill the structure in the MoH

Sector Policy statement;

Costing for building and equipment based on 07/08 report on "Cost of delivering services;

Operational costs are computed at 9% of wage;


Maintenance of building infrastructure computed at 1% of estimated investment costs as

provided in the 2007/08 cost report;

Maintenance of equipment computed at 2% of estimated investment costs as provided

in the 2007/08 cost report; and

The numbers from health units obtained from MoH database.

8.5 Proposals for financing the gap

The table below proposes ways in which the gap on non-wage recurrent costs may be

closed. Based on projections on the financing needs, current planned transfers under the

MTEF and local revenues growth, the financing gap is likely to reduce marginally in the

medium term from 68% down to 61%. The study proposals to introduce community

contributions but these may only reduce the gap further by about 5%. It is the proposal

that government significantly increases financing to LGs to further reduce this gap. Other

measures, including improving in expenditure control and management, are likely to

contribute significantly to reducing this gap further.

Table 8.11: Proposals for closing the gap on non-wage recurrent

Projections (figures in Shs.millions)

2011/12 2012/13 2013/14 2014/15 2015/16

Estimated needs

District non-wage (incl. towns) 1,398,366 1,538,202 1,692,023 1,861,225 2,047,347

Municipal non-wage 108,993 119,892 131,881 145,070 159,577

TOTAL projected needs 1,507,359 1,658,095 1,823,904 2,006,294 2,206,924

Projected funding

CG Non- wage transfers 338,660 379,140 435,730 484,980 604,980

Local Revenues 137,738 165,286 223,135 234,292 246,007

Total current projected financing 476,398 544,426 658,865 719,272 850,987

Gap in financing

Estimated Gap 1,030,961 1,113,669 1,165,039 1,287,022 1,355,937

% Gap 68% 67% 64% 64% 61%

Funding the Gap

Community Contribution 84,323 84,716 85,117 86,819 87,236

Gap after local initiatives 946,638 1,028,953 1,079,922 1,200,203 1,268,701

% gap 63% 62% 59% 60% 57%

In the table above, figures for estimated needs under 2011/12 are derived from the

computations under section 8.4.1. Non-wage figures projected for the years 2012/13 are

projections by 10% increase from the previous year. Central Government transfers are

derived from the MTEF while projections of local revenues are derived by including

increments from improvements resulting from measures proposed in this study.

8.6 Recommendations


The recommendations provided below are directed to address multiple issues identified

above to the extent possible:

The Government will need to give priority to resolving the low staffing with particularly

emphasis on administration and management functions of LGs and in service

delivery units. Health centres will require staffing levels to be significantly improved in

order to improve the impact on service delivery. In addition, Government will need to

review the responsibilities for deployment of health staff to mitigate the impact for

those LGs that are unable to attract the right numbers of staff;

As Government increases focus on service delivery, priority should be given to

strengthening supervision and monitoring function of LGs. The LG discretionary

financing (unconditional grant / local revenues) should be increased to enable LGs

to facilitate local Councils in their oversight function and for management to

undertake regular supervision and inspections of service delivery units timely;

LGFC to assist LGs to develop and operationalize an O&M policy for all assets and

investments in services.

Capacity for financial management in service delivery units should be strengthened.

Heads of service units should improve their knowledge and use of financial

management principles including in the use of cash management tools. In addition,

more facilitation should be provided to LG internal audit functions to provide the

required check on the management of financial transactions by service delivery

units;

Government should improve the financing of LG service delivery. The actions include:

o Require that service grants from Central Government are in line with the cost to

provide the service and adjusted annually for inflation;

o Require that unconditional grants are provided to improve resources available

for LG supervisions, monitoring, and internal audit functions;

o Enable LGs to enhance their own source revenues by implementing the

recommendations identified in Chapter 7 so that LG can contribute increasingly

and meaningfully to the financing of their functions; and

o Promote more participation and contributions from communities as discussed

above.

Government should review the policy on community contributions. Communities should

make contributions in kind, volunteer or make some payments towards delivery of

services; parents should be encouraged to pay for school feeding and contribute to

building school infrastructure. Communities should be organized to make

contributions to the maintenance of water points, etc. This will encourage greater

local ownership and sustainability of local services. It will also develop local

participation which should in turn encourage demand for accountability – a key

principle in the decentralisation policy. Tables 8.12 and 8.13 below illustrate the

possible impact of community contributions in health and education (UPE). Both

cases show that community contributions, at sustainably low levels, can move very

close to closing the financing gaps in the two sectors. Without introducing community

contributions, the Government will need to provide resources to meet the financing

gaps


Table 8.12: Illustration of covering the Financing gap in health using Community

Contributions

HC 11 HC111 HC 1V

Present recurrent Cost

needs 2,984 10,153 26,560

Available funds 2,085 4,170 8,341

Annual cost Gap 899 5,983 18,219

Funding % 30% 59% 69%

No. Units nationally 2,197 1,096 117

National Gap 1,975,103 6,557,368 2,131,623

Funding the Gap

Number of Daily patients 162 115 80

Community Contribution

(Rate payable per visit to

Health unit) 500 1000 1500

Days in a year 300 300 300

Revenue 24,300,000 34,500,000 36,000,000 94,800,000

National contribution

53,387,100,0

00

37,812,000,00

0

4,212,000,

000

95,411,100,0

00

Table 8.12: Illustration of covering the Financing gap in Education (UPE) using

Community Contributions

Kichinjaji

P.S.

Soroti M.C.

Nadunget

PS

Moroto DLG

Bessania

PS

Mpigi TC Average

Average cost needs 16,657,046 5,078,369 3,520,445 8,418,620

Cost per child 11,046 13,875 11,774 12,232

Capitation transfer per child 7,000 7,000 7,000 7,000

Annual capitation Gap 4,046 6,875 4,774 5,232

Gap % 37% 50% 41% 43%

Number of children enrolled 10,780

Projected average 6,021

National average gap 64,911,259

Funding the Gap @ 6000 64,679,598

Community contribution per child at only 2000 shillings per term 6,000

Total National parent

contribution p.a. 64,680,000

Implementing this may require a review of some policies or existing laws. For instance,

the Education Act will need to make it mandatory for parents to pay towards meals

and contribute to maintenance of school infrastructure.


9 PROPOSED INTER-GOVERNMENTAL FISCAL DECENTRALIZATION

ARCHITECTURE

9.1 Introduction

The Intergovernmental Fiscal Decentralisation Architecture (FDA) refers to the design of a

country’s fiscal operations in a framework of its decentralisation policy. The FDA is vital to

the delivery of local government financing to and for maximising its value towards local

service delivery.

In discussing the FDA, this study follows the definition used by LGFC80 describing the FDA as

a function of five parameters namely: (i) revenue assignment, (ii) expenditure functions, (iii)

the inter-governmental fiscal transfer system (IGFT), (iv) the borrowing capacity of a local

government, and (v) the institutions for implementing fiscal decentralisation. The IGFT

outlines fiscal operations between the central and local governments and between the

layers of local governments. For the purpose of this study, it is defined to consist of 2 sub-

systems; the intergovernmental fiscal allocation (FAS), and the intergovernmental transfer

system (FTS). The FAS describes the allocation of funds in the national budget between the

central and local governments and between higher and lower levels of local governments

also commonly referred to as the vertical allocation, and the allocation of financing

between local governments at the same level, the horizontal allocation. On the other

hand, the FTS refers to mechanisms and rules for transferring financing which includes rules

for budgeting, disbursements, accounting and reporting.

This Chapter reviews Uganda’s FDAs. The main objective in reviewing the FDA is to

strengthen its support to the objectives of decentralisation in Uganda. The review is

expected to enhance management of fiscal operational in order to improve the

efficiency of local government financing and its support for local services delivery. The FDA

review draws on the findings and conclusions of earlier Chapters. The earlier sections of

this chapter are dedicated to the challenges facing the FDA and identifying issues to be

considered for revision. The latter part makes proposals for the revised FDA in the context

of 6 pillars. The chapter ends with identification of implications of the revised FDA on the

policy, legal and institutional framework

This study has a fundamental change regarding the mechanisms used for

intergovernmental fiscal transfers in Uganda. This study has recommended that

Government debates further the possibility of changing from a grants system to a revenue

sharing mechanism as the fiscal transfer system between central and local governments.

This recommendation has major implications for the fiscal decentralisation architecture in

Uganda. Since this debate is yet to take place, this study has limited its revisions of the FDA

to the grant system. The FDA will be reformulated to suit the final decision at an

appropriate time.

The FDA is distinct from the FDS. The FDA is broader covering all aspects of the fiscal

decentralisation framework. On the other hand, the FDS is a strategy focussing on

streamlining the grant transfer mechanisms in a form that would enhance local

80 See Technical Note on the Review of Local Government financing in Uganda, Adam Babale / Vincent Maher, March 2011


participation and autonomy. Transfer mechanisms are only one part of the FDA. Whilst, as

discussed under Chapter 3, the reforms under the FDS have not been implemented in full,

its key principles remain relevant to the FDA. The revisions proposed in this Chapter do, to

the extent possible, integrate these key principles into the FDA.

9.2 Uganda’s Policy of Decentralisation and its challenges

Decentralisation is hinged on three pillars; political, administrative and financial (also

referred to as fiscal) decentralisation81. The political level involves democratic leadership,

participation at all levels, decision making and power relations between the centre and

local governments. The administrative decentralisation focuses on legislative powers and

administrative management including human resource management, while fiscal

decentralisation involves planning, budgeting and budget implementation including

accountability, and supervision. The success of the decentralisation relationship is heavily

dependent on effective synchronisation of the political and technical elements and

functions. Decentralisation takes three forms, de-concentration, delegation and

devolution82. These are explained in the box below:

Box 9.1 Common typology of “Decentralisation

De-concentration is often considered to be the weakest form of decentralisation and

is used most frequently in unitary states-- redistributes decision making authority and

financial and management responsibilities among different levels of the central

government. It can merely shift responsibilities from central government officials in the

capital city to those working in regions, provinces or districts, or it can create strong

field administration or local administrative capacity under the supervision of central

government ministries.

Delegation is a more extensive form of decentralisation. Through delegation central

governments transfer responsibility for decision-making and administration of public

functions to semi-autonomous organizations not wholly controlled by the central

government, but ultimately accountable to it. Governments delegate responsibilities

when they create public enterprises or corporations, housing authorities,

transportation authorities, special service districts, semi-autonomous school districts,

regional development corporations, or special project implementation units. Usually

these organizations have a great deal of discretion in decision making. They may be

exempt from constraints on regular civil service personnel and may be able to charge

users directly for services.

Devolution a third type of decentralisation is devolution. When governments devolve

functions, they transfer authority for decision-making, finance, and management to

quasi-autonomous units of local government with corporate status while the centre

retains policy making and oversight functions. Devolution is a much more expansive

transfer of power to lower governments.. It gives beneficiaries significant say in

decision making and local priority setting, in addition to enabling LGs to hold local

officials accountable.

81 Refer to Decentralization Policy Strategic Framework, section 3.3 82 See Decentralisation Policy Strategic framework, Section 3.1


Uganda’s stated policy choice in decentralisation is by “devolution83”; devolving

responsibilities and powers over their execution to “the point where they are actually

delivered and thereby improve accountability and effectiveness84”. It widely

acknowledged that decentralisation on the dimensions of political and administrative has

progressed well towards the concept of devolution. Fiscal decentralisation still lags behind.

The challenges identified in the preceding chapters attest to this view. In recent past,

various developments have extended this challenge to the concept of devolution. Some

of these developments listed here below:

The re-centralisation of the appointment and deployment of the Chief Administrative

Officers, Town Clerks and their deputies who are also the accounting officers of the

district and municipal councils. Whilst necessary to give greater independence to

CAOs and Town Clerks in their decisions, the re-centralization strengthens control of

central government over these officials and has the potential to weaken local

accountability;

The remuneration of the key LG political positions by the Central Government including;

District Chair, District Vice Chair, the District Executive Committee, and the Speaker.

While policy provides more predictability in emoluments of these key officials, it has

the potential to weaken their accountability to local communities and commitment to

increasing levels of local revenues;

Changes to local revenue sources by Central Government leading to reductions in

locally raised revenues weakens the concept of discretion in decision making and

local autonomy; and

Increases in the number of districts reduce the scope and viability of local revenues

sources and reduced ability to attract staff in posts.

These developments are contrary to the strict definition85 of the devolution principle.

Prudence may have necessitated the adoption of some of the practises above. In such

circumstances, the variation in practice need not be construed as policy change. Lessons

may be taken from other countries in comparable situations which face similar challenges

as in the example below from Tanzania

Box 9.2: Extract from Tanzania’s Fiscal Arrangements, Luc Noiset and Mark Rider

The central government plays a significant role in personnel for delivery of services. Thus

despite the seemingly genuine desire to decentralize along the legal language of

decentralisation, a system has emerged in Tanzania that is de facto less decentralised

than might appear by simply reading the enabling law. This observation does not

necessarily imply that the government is at fault or that some alternative approaches

might be better suited to achieving the ultimate goal of fiscal decentralization in

Tanzania. It might instead be the case that obstacles to decentralisation in Tanzania

arising from fundamental obstacles of the country’s social economic conditions and its

political economy preclude following the prescriptions of the normative theory of fiscal

decentralisation in countries like Tanzania, at least at this stage of their development.

83 The Constitution, Article 176(2a) 84Decentralisation policy Strategic Framework, MoLG, 2006 85 The Decentralisation Policy Strategic Framework (Section 3.1) gives the definition of devolution to refer to assignment of corporate status

and autonomy to LGs in decision making, planning, administration, financial and development management


Some changes in practices need not be construed to mean a reversal of Government’s

policy, but rather a practical adjustment to reflect realities and/or the pace of

decentralization.

9.3 The FDA and Challenges in its implementation

Based on the definition in section 9.1 above, the FDA is treated to have components as

depicted in the diagram below:

Key aspects of Uganda’s FDA are defined in the Constitution of the Republic of Uganda

(1995) and supported by the Local Governments Act (Cap243). This includes the functional

responsibilities of local governments, their powers for raising revenues (1995 Constitution

article 191 and LGA (section 80)) and the mechanisms for sharing such revenues. Local

governments borrowing powers are stated under Section 84 of the Local Governments Act

(Cap243), and the rules for borrowing are further elaborated in the fifth schedule (section

25) of the Act. The Public Finance and Accountability Act (2003)8687 is a key piece of

legislation on procedures of financial management and expenditure control. Local

Government finance and accounting regulations (2007) form an integral part of the legal

and regulatory framework.

The Government has made tremendous progress in implementing elements of the FDA

over time. However, as widely identified in the preceding chapters, a range of gaps

remain. Many practices have not often adhered to the provisions of the law or the

operational rules that have been set out. Gaps have emerged in legislation or guidelines

that have limited implementation. In other cases, new policies or practices have emerged

86 Discussion here refer to the Public Finance bill yet to be approved by Parliament, Once approved, it will replace the PFAA (2003) and the Budget Act (2002) 87 It is expected that the Public Finance Bill will be enacted to replace the Public finance and Accountability Act(2003) and the Budget Act (2001)


that do not conform to the policy of decentralisation, for example ones that have had the

effect of re-centralisation, which are weakening the FDA.

These key challenges are discussed further below.

9.3.1 Coordination and Management Coordination and management is core to operations of the FDA. This includes

coordinating and supervising all stakeholders implementing various aspects of the FDA,

ensuring appropriate reporting and monitoring are undertaken to meet the objectives of

the FDA.

The review of the FDS under Chapter 3, has identified the issues below which are attributed

to a weak coordination and management function of the FDA;

The legal framework was not sufficiently clear regarding the supervision of the FDA.

Government intended to correct this short-coming when it adopted the FDS. There

were also efforts to address this issue under the FDS by using the LGBC. However the

lack of a strong overarching coordinating institution88 to oversee the FDA

implementation has been cited as a major issues (Chapter 3);

LGBC and LGROC have been limited in coordinating the FDS reforms as a result of a

weak leadership role; and

The legal framework is not sufficiently clear regarding the responsibilities for

coordinating and overseeing the implementation the FDA.

9.3.2 Legal framework Most financial legislation is not adequate in its support to local government financing and

the LG financial management system. These concerns, also listed below, have been

discussed in chapters 4 and 5:

While the Budget Act (2001) establishes the budget calendar, it does not provide a

guide on its integration with the local government budget cycle. This is crucial for

further streamlining and protecting the FDA;and

The Public Finance and Accountability Act (2003) is not clear on the link between the

national and local government financial management systems. The Public Finance Bill

(PFB), which is expected to replace the PFAA and the budget act, in its current form,

carries on these limitations. It states clearly that it does not apply to local

governments89. There are several elements relating to the LG financial management

system which require clarification by the PFB or its supplementary law. These include:

clarifying the relation between the PFB and LG financial legislation including setting

general principles for control and management of public funds, the integration of

the national and LG budget cycles, setting general principles for LG reporting and

accounting, and setting general principles for control, management, accounting and

reporting on public funds by service delivery units – schools, health centres, etc.

9.3.3 Revenue assignments Implementing legal provisions on LRRs have largely been adhered to but with numerous

challenges (also refer to Chapter 7) especially regarding enforcement such as:

The revenues assigned to LGs are of a direct tax nature on largely low income cadres

which makes it susceptible to political resistance;

Changes in revenue rates and category may be made by the centre without any

consultation with the LGs or providing any compensation in the event of lost

revenues;

88Diagnostic of Intergovernmental Fiscal System – Urban Authorities in Uganda, Page 20 89 Section 3


Controls in relation to revising revenue assignments are inadequate; and

Revisions to revenue sources, such as the abolishment of graduated tax in 2004/05,

and suspension of specific fees and permits on transporters and markets have had

severe negative impact on local government financing and consequent service

delivery (see Chapter 7 and 8).

9.3.4 Expenditure Assignments The Local Governments Act specifies the sharing of expenditure assignments within the

decentralised Government structure. However, findings of the study below (also see

chapter 4) revealed continuous challenges to implementing this sharing framework:

A number of functions, for example trade development services, land administration,

(see Chapter 4) lack sufficient clarity in the separation of responsibilities between

central and local governments;

A number of functions remain unfunded or for which requisite funds were not

transferred to local governments over the years of implementing decentralisation;

The human resource management function is faced with a number of challenges

(see Chapter 4). The operations of the Districts Service Commissions are hampered by

the lack of appropriate competences and funding, and some LGs are failing to

attract / retain key professional staff. In addition, the position of Chief Administrative

Officer has been re-centralised; and

There are a range of functions in which local government are experiencing difficulty

in executing because of inter-jurisdictional overlaps or where the size of LGs do not

offer the relevant economies of scale to sustain the services. Field studies identified

such functions to include: human resource deployment / management for

professional cadres, service commissions, maintenance of road units, secondary,

special and technical education, physical planning and trade development services.

These functions could be better executed at a larger regional level.

9.3.5 Intergovernmental fiscal transfer (IGFT) The 1995 Constitution lays out provisions to support elements of the IGFT system; the vertical

allocation between the central and local governments is facilitated by a set of 3 grants

(article 193) - unconditional, conditional and equalisation grants. The Constitution offers

guidance on the determination of the size of each grant but this is not sufficient. Rules for

horizontal sharing among HLGs are sector based in the case of conditional grants. A

sharing system is used between layers of local government; the framework for sharing LRRs

is provided under Section 85 of the LGA while Central Government provides allocation

guidelines for those grants shared between HLG and LLG. Over time, Government has

established regulations and guidelines to support the implementation of the IGFT. These

have laid out in the rules and procedures of operations governing transfers from Central

Government including the accounting and reporting mechanisms.

There has been considerable progress in key aspects of the IGFT, notably in the

management of the releases of grants, accounting and reporting. Here below, are the

practices that have differed with some aspects of the IGFT

Conditional grants have continued to be the preferred mechanism for allocating funds

from the national budget to local government functions;

The number of conditional grants has continued to grow - the FDS reforms relating to

limiting the number of conditional grants, including the RTB/DTB transfer modalities

were not implemented;

Gaps still exist in aligning the conditional grant allocation formulae with the factors of

population, area and poverty (see Chapter 4);


Limited or no provisions are made for operations and maintenance costs under the

grants. This is limiting the ability of LGs to sustain existing service delivery infrastructure;

Some ministries continue to administer projects and programs related to local

government services outside the grant system;

Insufficient provisions are provided under the grants. Some grants have tended to be too

thinly spread. In addition, there has been marginal growth in value of the grants. As

a result, as the number of local government units and their populations have

continued to grow, more financing is channelled to administration and the impact

of the grant has continued to fall;

Central Government continues to delay the issuance of final IPFs impacting the

execution of the local government annual planning and budget process; and

There are gaps in defining conditional and equalisation grants (the Constitution, article

193) leaving open their interpretation and affecting their implementation (see

Chapter 4).

9.3.6 Institutional assignments Institutional responsibilities for the implementing the FDA are elaborated in part in LGA.

Other responsibilities are also assumed in the mandates ministries and agencies. See table

below for institutional mandates relevant to the FDA

Table 9.1: Institutional Roles under FDA

Agency FDA responsibilities

The Parliament of

Uganda

Appropriates grant allocations, approves changes to the

legal framework regarding the FDA, revenue and expenditure

assignments, and creation or removal of districts /

municipalities. Through the PAC oversight for accountability

and value for money in service delivery is exercised.

Cabinet Provides policy guidance to service mandates of LGs and

approve grant ceilings

Ministry of Finance,

Planning and Economic

Development

Facilitates the transfer of financing from the national budget

to local governments based on criteria set under each grant

Ministry of Local

Government

Inspection of the implementation of grants but also mentoring

and capacity building of local governments

National Planning

Authority

Defines the planning framework and coordinates the

development of the National Development plan its linkage

with LGs plans

Local Government

Finance Commission

Advises central government on matters of local government

financing including local revenues and grant allocations

Sector Ministries Sets sector service standards, define grants including their

allocation formulae and guidelines, and supervises / monitors

service delivery

Auditor General Provides external audit services to local governments and

issues reports of the Parliament and local councils

Local Government

Councils

Approves and supervises local government development

plans and budgets

LG PAC Reviews LG audits and provides an oversight function over LG

financial management

The responsibility for supervising the local government system and accordingly the FDA is

vested in the Minister for Local Governments who is supported in this role by the LGFC


coordinates closely with the MoFPED. In the context of implementing the FDS, two

committees were established:

LG Budget Committee (LGBC) - chaired by LGFC, was set up primarily as a coordinating

committee to promote fairness in conditional grants and their smooth

implementation. It facilitates a dialogue with sector ministries on the conditions

associated with grants, the allocation formulae and adequacy of guidelines. The

LGBC also facilitates linkages between the local government and national budget

processes by among other things reviewing and advising on issues arising from LG

BFPs for inclusion on the national BFP; and

Local Government Releases and Operations Committee (LGROC) - was intended to

facilitate the integration of the FDS reforms into the operations of releases. It works

with sectors to coordinate releases to local government and reporting and

accountability. It is chaired by MoFPED.

The following observations of the study represent key institutional challenges to the

implementation of the IGFT:

The political commitment that was experienced in the early years has slowed down and

with it, further progress in implementing fiscal decentralisation.

The role of sectors has increasingly become key in implementing the IGFT; in defining

grants including levels of transfers and in supervising the implementation. Various

studies have pointed to this role as a hindrance to the proper implementation of the

IGFT. The absence of a strong overarching and coordinating authority to get sectors

to actively implement the FDS or the decentralisation policy in whole has been well

documented90 as a critical factor;

The advisory function of LGFC91 has been challenged severally by other institutions the

consequence of which has been less control over local government financing. An

example of this can be seen in the number and size of grants or the revisions to the

local revenue sources, and their impact on services by local governments;

Whilst the LGBC and the LGROC were instituted to strengthen coordination in

implementing the FDS, there have been gaps in ensuring compliance with the FDS

measures and accordingly less success in implementing key FDS reforms. As a result,

for example, conditional grants have continued to grow in number;

Development Partners (DPs) have emerged as key institutional players. DPs make

contributions to local government financing largely through the national budget

either as budget support or project aid.

o Project aid poses a challenge as it may introduce rules of operation outside

the FDA.

o The dialogue between the Government and DPs providing budget support is

through the Joint Budget Support Framework (JBSF). Successive sessions of

Joint Assessment Framework (JAF) under the JBSF are capturing and will

continue to capture key performance benchmarks on local government

financing

9.4 Proposals for the revised FDA

The revised FDA will aim to strengthen fiscal decentralization by protecting and promoting

local government financing, enhancing orderliness and control in the management of

90 Diagnostics of Inter-government fiscal transfer system – urban authorities in Uganda, (Jasper Steffen and Emmanuel Ssewankambo2011) 91 The Constitution, 194(4)


intergovernmental fiscal relations, strengthening LG capacity for supervision / monitoring of

service delivery and increasing discretion in local decision making. In its design, the FDA

will build on past progress in implementing fiscal decentralisation including working and

enhancing the existing legal, policy and institutional framework. Key principles to guide the

design and implementation of the FDA should be transparency, accountability,

predictability, adequacy, equity, and incentives to raise more revenues and avoid waste.

9.4.1 Pillar 1: Legal and Policy framework The Constitution and the Local governments Act shall be the key pieces of legislation to

guide the FDA. Other supportive legislation will include the public finance law and

financial regulations issued from time to time. The goal in enhancing the FDA will be to

strengthen control in ensuring the FDA goals are met. . Amendments to be made to the

legal framework are listed in section 9.4.

9.4.2 Pillar 2: Leadership and Coordination Roles for leadership and management of the FDA will be assigned as follows:

The Prime Minister shall have oversight responsibilities over the FDA monitoring progress in

its implementation resolving policy issues affecting its use;

The Minister of Finance shall be the champion of the FDA. The Minister shall ensure that

rules, procedures and standards for the FDA are adhered to. The Minister shall

provide the technical interpretation of the FDA and shall be the responsible party

effecting amendments to the FDA; and

The Minister of Local Government shall be the lead advocate on local government

affairs. The Minister shall lead amendments to the LGA and the regulations.

9.4.3 Pillar 3: Expenditure assignments Expenditure assignments for local governments are functions that are decentralised to

local councils under the Second schedule of the LGA (Cap243). Levels of LGs will share

functions as provided in the same schedule. However, under section 32, the LGA (Cap243)

provides rules for delegation92 of a Central Government function to a local government.

Reverse delegation is also provided for under Section 31(1).

The goal of the FDA under this pillar will be to improve the efficiency and effectiveness of

local governments in providing services by improving clarity and strengthening control

over the allocations of expenditure assignments and their financing. Central Government

will support the LGs to provide further clarity over expenditures where overlaps exist and to

update the legal framework accordingly. HLGs will continuously review and clarify the

sharing of responsibilities with LLGs. Central Government will institute policies that will deter

interferences or changes in expenditure assignments that are likely to have adverse

impacts on the capacity of LGs to deliver services.

The following provisions will apply to the expenditure assignments:

Expenditure assignments will be outlined in LGA (second schedule);

Expenditure assignments to LGs will be sufficiently clear allowing LGs to exercise their

roles fully;

Amendments to the sharing of functions between central and local government would

be subject to approval by Parliament;

All mandates, resulting from expenditure assignments, to LGs shall be fully financed;

92 Delegation in this study is interpreted to mean requesting one entity to administer or execute another entity’s function on it behalf


Sharing of staff assignments between central and LGs, and between layers of LGs will be

such as to facilitate deployment, attraction and retention to support services

delivery; and

Changes to LG expenditure assignments shall be supported by measures that will protect

LGs capacity to deliver services.

9.4.4 Pillar 3: Revenue sources (incl. revenues assignments, grants, other sources,

borrowing) Local governments shall receive revenues from the following sources: (i) locally raised

revenues (also see 9.3.5 below), (ii) transfers from Central Government (also see 9.3.6), (iii)

contributions by development partners or/and NGOs, and (iv) contributions by

communities.

The goal of the FDA will be to increase the level of financing and its impact on service

delivery through better efficiency and control over revenues sources and their yields,

improving the discretionary element of these sources, limiting external interferences and

interventions that may disrupt collections, and ensuring growth of revenues over time. LGs,

with support from Central Government, shall strengthen capacities for assessing and

forecasting of revenue yields, improve administrative efficiency of revenue sources,

undertake campaigns to increase compliance in the case of LRRs. Central Government

shall put in place policies that will deter undue interference in the LG revenue sources and

their administration.

LRRs are sources of revenues assigned to LGs under the Local Government’s Act. LGs will

have full control over these sources including setting rates, within guidelines provided by

Central Government, and administering them including:

Central Government shall ensure that no taxes or other sources of local revenue shall

be abolished except if replacement sources have been identified and are proven to

provide same or between yields of revenues. In all cases, LGs shall be fully

compensated for any reduction in their financing resulting from this action;

Central Government shall support LGs to develop a structure of LRRs sources which

shall be simple, easy to administer and, to the extent possible, with no exemptions;

and

LGs shall be provided with flexibility to determine rates for taxes and fees in all

revenue sources.

Grants from Central Government will be extended using mechanisms put in place under

the Constitution. The manner of determining, distributing and transferring these grants shall

be as provided in the section 9.5.5 below. Central Government shall take steps to increase

the discretionary financing within the grant system. No financing from Central Government

to local government programmes shall be designed and administered outside the grant

system as provided below.

Contributions by development partners or/and NGOs shall be limited to grants and may

be in kind or in financial terms. To the extent possible, they shall make these contributions

known to LGs in time for their planning cycle. To the extent possible, these contributions

shall be directed to priority activities identified in the LG development plan.

All sources of revenues shall be captured in the a single local government framework for

planning, budgeting, accounting and reporting and shall be subject to external audit by

the Auditor General


9.4.5 Pillar 4: Inter-governmental fiscal relations / transfers The intergovernmental fiscal transfer system will consist of the grants system together with

rules and practices governing transfersbetween central and local governments, and the

sharing system between levels of local governments. The goal of the FDA under this pillar

will be to enhance equity and transparency in sharing of the grants across LGs, and to

improve efficiency in transfer mechanisms between central and local governments. The

FDA will also aim to improve alignment of grants with expenditure assignments and

decentralised programmes.

a) Grants

The framework of grants will continue to consist of the unconditional, conditional and

equalisation but with specific rules ensuring that they are adequate and that they meet

the purpose for which they are intended. These grants are discussed further below.

i. Unconditional grant

Unconditional grant (UCG) shall be a sum of money provided to LGs as contribution

towards its management services including towards the cost for administration, and to the

operational functions of planning, O&M, monitoring, and supervision of local government

programs, auditing and the oversight function of Councils. The rules below shall apply to

the UCG;

The wage component of the unconditional grant shall cover the full cost of the staff

structure for each local government excluding service units such as schools, health

centres.

The grant will continue to be disbursed without conditions. However, to provide more

confidence about its contribution to improving service delivery, LGs will show its

allocation in the BFP and in the budget. In addition, each quarter, each LG shall

furnish to CG results of implementing the grant against a set of targets, for example,

the number of council meetings taken place in the quarter, the number of inspection

report submitted to Central Government, etc. Performance on these indicators should

be a pre-condition for release of sector based grants;

On annual basis, Cabinet shall ensure that the allocation to the grant meets the criteria

set out in the seventh schedule of the Constitution.

ii. Conditional grant

The Government is to review the structure of conditional grants limiting their number and

making them more flexible in responding to LGs’ needs as discussed in Chapter 4, and to

include the revisions in the FDA.

Eligibility of conditional grants shall be guided by the following criteria:

Service sectors eligible for conditional grants are limited to education, health, water,

agriculture / production, roads, and environment;

Salary conditional grants will be limited to sector service delivery units outside of the main

LG administration such as schools, and health centres;

Each sector shall have no more than 3 conditional grants; wage, non-wage recurrent,

and development; and

Annual growth in sector grants shall be in line with price increases.

When creating a new conditional grant, the following rules shall be followed:

- Cabinet shall be responsible for creating new grants;


- The proposed new grant shall fit within the structure of grants as described in the FDA

and as discussed above and is distinct in the services for which it is intended;

- The cost for delivering services for which the grant is intended have been determined,

including overheads for supervisions and O&M in the medium term as the case may

be;

- MoFPED has confirmed that this level of additional financing will be met and has been

integrated in the medium term expenditure framework (MTEF);

- The appropriate allocation formulae for the grant has been developed, discussed with

local governments and the LGFC and takes into account the key parameters

relating to disparities in LGs for delivering the intended services; and

- The allocation formulae are output / outcome based allowing for flexibility in allocations

by LGs.

On annual basis, Cabinet shall ensure that the allocation to each grant meets the criteria

set out for growth of unconditional Grant in the seventh schedule of the Constitution.

iii. Equalisation grant

Eligibility for the grant shall be tied to low revenue potential and the existence of unique

conditions that constrain delivering services within a LG, for example, difficulties in

operations associated with island LGs or unique terrain in high altitude or mountain LGs.

b) Rules governing the grant system;

The Government will develop a set of rules to be applied to the grant system. These will

include but not limited to the following:

Each grant is to have a transparent and equitable allocation formula developed

through a transparent process of consultation with LGs and LGFC;

In determining the allocation formula, the sector ministry will include provision for O&M

where the grant requires the use of or is investing in infrastructure. For example UPE

capitation needs to include O&M;

The level of each grant should be sufficient to meet the cost of financing the services for

which it is intended. Where this criteria is not met, the sector will furnish a plan, agreed

to with MoFPED and LGFC, providing a commitment to address the gap over the

medium term;

Each grant shall be accompanied by guidelines that will conform with FDA requirements,

for its implementation both for central agencies and local governments; and

The amount under each grant shall be adjusted annually to compensate for price

changes and for changes in the scope functions.

c) Financing other than grants

All financing related to local governments must fit within the criteria of the grant system.

Sectors using other channels of transfers will integrate their funds into the grant system with

clarification of how the roles for administration of financing will be shared. In this regard,

rules governing external assistance related to local government functions, as provided in

the aid management manual, will need to be amended to conform to the rules in (b)

above and section 9.3.7.below.

9.4.6 Pillar 5: Rules of operations The following set of rules should be integrated in the FDA for the purpose of streamlining

transfer mechanisms during the annual planning and budget cycle:

Every year, at the beginning of the annual budget planning process, the LGFC, in

conjunction with Ministry of Finance, and Ministry of Local Government shall prepare a


policy briefing on local government finance and service delivery to be provided to

Cabinet at the time of considering spending priorities;

Cabinet will approve policy targets for local government service delivery and make

aggregate allocations for LG grants which will provide the basis for sectoral grant

allocations to meet these targets;

Each year, MoFPED will provide to Parliament a plan for local government financing

and targets for service delivery together with the national medium term expenditure

plans as required by the law93;

At the beginning of the annual planning cycle, sectors will advise MoFPED of the

indicative planning figures (IPFs) under each grant. In turn MoFPED will be the single

institution to advise LGs of the IPFs;

Every year, the MoFPED shall issue IPFs to LGs in time (not later than the period set in

the budget calendar) to enable them commence to prepare their annual spending

plans;

All transfers to local government shall be made by MoFPED using the rules for release

(release guidelines) issued by the Ministry except as provided in c) below;

The following transfers shall be exempted from the rules in (b) above. These will be

transfers related to specific goods and services for which central procurement and

delivery is found to increase efficiency. MoFPED will issue detailed guidelines for

expenditure items that may be treated under this category. In all cases, the agency

responsible for the transfer shall advise MoFPED of the allocation formula used, the

annual ceiling and actual spending levels per LG on quarterly basis. Examples of these

transfers:

- Procurement and delivery of medical and veterinary drugs which are divested to

National Medical Stores;

- Procurement of and delivering schools’ instruction materials and text books under

the Ministry of Education; and

- Procurement of national examinations (UNEB fees) for primary and secondary

schools under Ministry of Education.

Transfers for salaries and other staff emoluments shall be made by MoFPED

directly to staff against the payroll that will be verified and approved by the LG;

Transfers to service delivery units that have separate management outside

the central LG administration such as schools, hospitals and health centres, will also be

made directly to the bank account of those units. However, (i) LGs will be responsible

for reviewing, verifying and clearing reports from these units before forwarding

requisitions for funds to Central Government (MoFPED), and (ii) reporting

arrangements for all such units must be through the respective LG including their

annual budgets, quarterly reports, and annual accounts and audits;

LGs shall apply each grant and report on its usage in accordance with the

rules provided in the guidelines;

93 Budget Act 2001, Section 4


Balances that remain unspent on transfers to local governments at the end of

the financial shall be retained and not returned to the consolidated fund at the end

of a financial year. However, LGs shall re-vote these balances in the budgets for the

new financial year and shall furnish a new plan to sector ministries on the planned

expenditures under these funds;

On an annual basis, an assessment of the performance of LG system is to be

conducted covering local government financing and service delivery and based on

an agreed set of policy targets as part of policy monitoring. This process will be led by

LGFC and will be integrated into the annual LG assessment. It will require to have

targets set for the entire LG system and each LG individually.

Every third year, a full blown assessment of the operations of fiscal

decentralisation and support to LG financing is to be undertaken. This is intended to

check the policy direction on fiscal decentralisation and to inform key reform actions

for the next three years. This assessment shall be used to review and re-negotiate

targets for financing (grants) and service delivery. This is to be overseen by the Minister

of Finance in conjunction with the Minister of Local Government and the

Chairman/LGFC

9.4.7 Pillar 6: Specific Institutional roles Institutions should be assigned roles clarifying their contributions to the FDA. Specific

responsibilities relating to FDA include the following:

a) Parliament

Parliament will provide oversight over the implementation of the FDA and protection

of LG financing. Parliament will be provided with appropriate data by the executive

(MoFPED/LGFC) to effectively undertake this role. In particular, Parliament will:

- Inspect annual and medium term budgetary allocations to ensure consistency

with the implementation of the Constitutional provisions on grant allocations; and

- Receive and review annual performance reports on LG financing and service

delivery and provide recommendations to the Executive to address gaps.

b) Cabinet

Cabinet will oversee the implementation of the FDA ensuring that all MDAs are in

compliance with the FDA requirements. In particular, Cabinet will:

- Approve and issue the revised FDA. Future amendments to the FDA will similarly

be approved and issued by Cabinet;

- Issue rules and guidelines regarding the implementation of the FDA;

- Coordinate policy discussions in relation to LG service delivery;

- Approve the creation of new grants and issue guidelines for allocations formulae

for all grants;

- Set policy targets for local service delivery and make aggregate allocations to

the grants for these services;

- Monitor allocations to grants ensuring that their growth is consistent with

Constitutional provisions; and

- Ensure that decisions with implications on LG financing, including the creation of

new districts / LGs or the abolishment of local revenue sources do not negatively

impact financing of any LGs.

c) Office of the Prime Minister (OPM)


OPMwill provide oversight over the implementation of the FDA within guidelines set

by Cabinet. OPM will ensure compliance by MDAs and will resolve any policy,

institutional and operational conflict in the implementation of the FDA provisions.

d) The Minister of Finance

The Minister shall be the champion and political head of the FDA, and the Minister

shall supervise its implementation. The Minister will coordinate the implementation of

the FDA reform program within the policy and political structures of Government

including within Cabinet and Parliament and shall periodically issue any

supplementary guidelines to MDAs on the FDA.

e) The Minister of Local Government

The Minister has the political mandate to implement the policy of decentralisation.

The Minister shall update and upgrade all LG legislation to align it with the revised

FDA. Coordinating closely with counterparts in MoFPED and MPS, the Minister will be

key to implementing institutional and financial reforms identified to the FDA.

f) Local Government Finance Commissioner (LGFC)

LGFCshall be the custodian of the FDA, monitoring its implementation, and ensuring

that all changes to the FDA uphold the integrity of the local government financing

system. The LGFC is to work with the Ministers of Local Government, and of Finance

and other appropriate authorities (political and technical institutions) to monitor the

implementation of the Constitutional provisions of the grants and rules established

under the FDA.

In view of the FDA responsibilities, the Chairperson of the Commission shall engage at

policy levels with Cabinet, in support of the Minister for Local Government and the

Minister for Finance on issues of local government financing. The Chairman shall also

o prepare technical and policy notes on local government financing and service

delivery and provide support to the Minister of Finance and Minister of Local

Government in Cabinet meetings at the time of reviewing the annual budget

strategy, and with the Parliamentary Committee on Local Government during

budget discussions;

o advise Cabinet, Minister of Finance and Minister of Local Government on the

level of compliance with the implementation of the FDA; and

o provide periodic monitoring reports on the implementation of the FDA to the

OPM, MoFPED and MoLG.

g) The Ministry of Finance, Planning and Economic Development (MoFPED)

The Ministry has a mandate for resource mobilisation, for facilitating budget

preparation and releases to local governments. Through the LGROC, the Ministry

shall lead the implementation of reforms of the operational rules in section 9.2.7. The

MoFPED shall establish procedures and guidelines for the implementation of rules for

transfers as amended under the FDA. MoFPED shall ensure the integration of

operational rules into existing financial regulations and systems for financial

management. The Ministry shall also ensure that non-budget support donor funding

related to local government mandates is disbursed and reported on using modalities

consistent with the FDA


h) Sectors Ministries:

Sector ministries shall remain the centres for policy formulation and monitoring.

Consistent with the legal provisions, they will continue to set sector service standards

and supervise / monitor service delivery. Sectors, following consultations with LGFC

and MoFPED, will advise Cabinet on the need to create new grants ensuring such

proposals are aligned to the FDA.

i) LG Budget Committee (LGBC)

LGBC, under the chair of the LGFC, should integrate the FDA procedural changes

related to releases and reporting that are proposed into the budget cycle. The LGBC

will report to the Minister of Finance.

j) Local Government Releases and Operations Committee (LGROC)

LGROC will support the LGFC to coordinate the implementation to the grant system

that will have been agreed to.

k) The Public Sector Management Working Group (PSMWG)

PSMWGwill integrate, monitor and coordinate FDA reforms in the sector work plan.

l) Development Partners (DPs)

The Joint Assessment Framework (JAF) will be used to monitor FDA reform

implementation for the purpose of dialogue with the DPs on local government

financing. The Government should also encourage DPs other than budget support

donors, to channel their support through budget support modalities to the extent

possible or to grant more flexibility in rules and conditions associated with project aid

to increase its alignment to the FDA.

9.5 Implications to policy, legal and institutional framework

Changes to the FDA will have implications for the policy, legal and institutional framework.

Changes that are proposed at this point are:

a) The Minister of Local Government:

The Ministershall, by statutory instrument, establish regulations providing rules and

procedures for reviewing the local government structure, expenditure or revenue

assignments and identifying key responsibilities for MoLG, LGFC, MoFPED in execution

of the technical processes supporting these tasks. The regulation should also guide

Cabinet in their roles in clearing such changes.

The Minister shall provide the leadership to amend the LGA (Cap243) to clarify the

definition for the equalization grant, including providing a requirement for assessing it

impact; and to provide for annual growth of provisions of both conditional and

equalisation grants in line with the unconditional grant formula provided in the

seventh schedule of the Constitution.

b) The MoFPED

MoFPEDshall introduce changes to the Budget Act (2001) and the Public Finance

and Accountability Act (2003) to integrate the LG annual planning and budgeting

cycle and to require budget guidelines to be issued to LGs not later than the date

established in the budget calendar, and to present to Parliament a medium term


plan for local government service delivery financing along with the national medium

term expenditure plan in April.

The Ministry shall lead a review of local government financing, including Central

Government grants and revenues generated by LGs, to provide sufficient funding to

cover all decentralised responsibilities assigned under the FDA. This will eliminate the

“unfunded” mandates.

MoFPED shall lead the review and expand the LG planning and budget guidelines to

clarify the recording of donor flows and community contributions during planning

and budgeting

c) The Ministry of Education

The Ministryshall review the Education Act and issue regulations to strengthen the

reporting arrangements between the head teachers for secondary schools and the

LG administration. This should ensure the LG increase their supervision and oversight

over secondary schools.

d) The Ministry of Local Government (MoLG)

The Ministry shall introduce rules governing amendments to local revenue sources

using statutory instruments, to clarify controls necessary to provide their protection.

The Government, through MoLG,will review the sharing of responsibilities for

professional staff between central and local government in view of the increasing

difficulty to attract and / or retain specific cadre within the local governments. The

review will have to balance the proposals for centralising staff and needs for local

accountability. The Government will also review the responsibilities for pensions. In

view of the centralized wage policy and direct transfer mechanisms, LG should

retain the function of verification of pension beneficiaries in the same way as they

do for payroll.

The Ministry shall lead the development of a local revenue policy to guide the

creation and management of revenues sources.

The Ministry, in conjunction with MoFPED, shall lead the development of a policy,

together with guidelines, for local community contributions. This will be issued to LGs.

The Ministry shall review the LG finance and accounting regulations and manual to

clarify accounting and reporting on donor flows and community contributions.

e) The LGFC

The Commission shall expand or strengthen the roles of the revenue and policy

directorate and strengthen the analytical function on local government financing

and its impact on local service delivery. A proposal for the roles under this function is

provided under section 9.7.

f) Central Government Ministries

Ministries will need to work together with LGs to further clarify grey areas of

responsibilities (see chapter 4). Amendments are to be made to the FDA (including

as necessary the LGA, second schedule) to provide the clarification.


9.6 Proposed expanded functions of the LGFC

The following are functions proposed under the LGFC policy directorate aimed at

strengthening the analytical role on local government financing and service delivery:

a) Providing technical support to the expanded profile of the LGFC;

b) Working with LGs, to identify and establish a framework for monitoring the capacity

and effectiveness of the local governments in the delivery of local services;

c) Monitoring and resolving impediments which limit the impact of local government

financing on service delivery. The unit should be able to study and advise on cross

cutting issues including laws, policies, institutional mandates and their impact on the

effectiveness of local government financing;

d) Studying new policies and laws and advising and making proposals on mitigating

any negative effects of these items on local government financing;

e) Undertaking, on an annual basis, an impact analysis of LG financing on service

delivery focussing mainly on cross cutting policy issues in the context of the NDP

objectives, and to guide policy debates particularly during the budget planning

process. This report shall be provided to Cabinet, Parliament, NPA and Development

Partners. In this regard, the LGFC will advise on measures and targets to improve

efficiency and levels of local government financing, prepare an annual analytical

publication on LG financing and service delivery, and analytical notes to feed into

the budget strategy and background to the Budget; and

f) Liaise with MoFPED and Economic Development Policy and Research Department

(EDP&R) to provide input to key policy instruments on local government financing.


10 FISCAL DECENTRALIZATION ARCHITECTURE- IMPLEMENTATION MATRIX

Recommendation / Action Responsibility

Institution

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Approval of LG financing study report by Cabinet MoLG / LGFC

Launch of the LG Financing study report MoLG

Inter-governmental fiscal relations

Strengthen institutional and legal mechanisms to protect and improve

advocacy for grant financing levels

Review format of budget policy documents (budget strategy,

background to the budget) to include sections on LG service delivery

MoFPED

Review budget cycle to include Cabinet review and allocation of

financing to LG service delivery during budget planning

MoFPED

Introduce an annual Policy brief on LG financing and Service delivery

to Cabinet and Parliament

MoFPED /

LGFC

Amend the Public Finance (Public Finance Bill) law to require MoFPED

to provide a medium term plan for financing LG service delivery to

Parliament in April together with medium term plans (refer to section 4

of the Budget Act)

MoFPED /

LGFC

Strengthen the analytical capacity of LGFC to prepare and provide

policy inputs on local service delivery and LG financing to the budget

strategy and other policy notes to Parliament

LGFC

Improve clarity in Expenditure Assignments

Review and provide clarity on sharing of responsibilities between

central and LGs for areas of overlap or unclear mandates identified in

the study

MoLG / MoPS

LMs

Review the sharing of HR responsibilities between CG and LGs to

improve attraction, deployment and retention of staff to local

government services

Review medium term allocations of LG financing to adjust for

clarifications in roles / mandates

Review the grant system to increase LG discretion and provide for

management services

Develop & issue guidelines providing clarity on interpretation of the

three grants; UCG, Cond Grant and EG, and rules for creation and

operation of the grants

Cabinet

Restructure the conditional grants and the equalisation grant in line MoFPED/



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4 with guidance above and develop guidelines for their

implementation

LGFC

Develop and issue new guidelines on developing sector policies and

grant allocation formulae to provide increased flexibility to LGs in their

implementation and to include provisions of O&M where applicable

MoFPED/

LGFC

Integrate the new structure of the grants into existing system (Chart of

Accounts) for recording, accounting and reporting

MoFPED

Review the levels of the unconditional grant to increase flexibility in

allocating towards the key management services in line with

guidance above

Cabinet

Provide periodic adjustments to the UCG in line with the Constitution Cabinet

Amend the LGA to improve clarity in mandates as agreed above MoLG

Amend the LGA for new definitions of grants MoLG

Amend the LGA to provide for annual adjustment to CG consistent

with UCG

MoLG

Review the aid management manual to clarify the integration of aid

funding for LGs into the grant system

MoFPED

Implement a plan to transfer all financing for LG services into the grant

system

MoFPED

Annual Planning and Budgeting

Amend the Public Finance Bill should include timelines for issuing

budget guidelines including IPFs

MoFPED

Review and align the LG planning and budgeting framework taking

into account the new planning process under the five year NDP

MoFPED/NPA

/LGBC

Provide budget guidelines and IPFs timely to LGs to avoid hasty

planning and budgeting

MoFPED/

ministries

Implement a plan to strengthen theLGBC LGFC

Draw up and implement a framework to provide more funding

towards planning and budgeting activities LLGs

MoFPED/LGF

C

Validate and take into consideration accounts in arrears, outstanding

liabilities and guarantees when preparing LG budgets

MOFPED/LGB

C/LGs

Implement recommendations of the MoLG Annual Assessments of LGs MoFPED/LGF

C

Releases, Reporting and Accountability Mechanisms

Implement a plan to support planning and procurement efforts in

weak LGs

MoFPED/PPD

A

Reinstate submission of Form B as condition for granting quarterly

releases

MoFPED



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4 Clarify rules and procedures for LGs to return unspent balances at end

of FY

MoFPED

Expand direct transfer of funds to health centres and all service

delivery units

MoFPED

Review the Education Act and issue regulations to strengthen the

reporting arrangements between the head teachers for secondary

schools and the LG administration

MoES

Engage sectors ministries to adopt their reporting requirement to Form

B.

MoFPED

Implement a plan to improve capacity of LGs in the use of OBT and

Form B

MoFPED

Implement a plan to strengthen the capacity of internal audit function MoLG/LGs

Implement a plan to improve capacity of Councils in their oversight

role

MOLG/LGs

Revenue enhancements

Implement policy and administrative measures to improve revenues

collections

Develop a policy to guide and enforce collection of revenues in LGs. LGFC

Review LST and Property rates to minimise exemptions and to evolve a

more flexible and efficient mechanisms for setting rates

LGFC

Review the tax tribunals to make them more representative and

effective in handling tax conflicts

LGFC /

MOLG

Design and implement sharing mechanism of revenues from fishing

and forestry between NFA and Fisheries department on the one hand

and LGs

LGFC /

MOLG

implement the provision of the Local Government Rating Act, section

37, linking revenues collections to service delivery

LGFC /

MOLG

Develop a policy to bar political interference in the administration of

local revenues

LGFC /

MOLG

Set up an Independent Revenue Department in each local

government and provide a revenue matching grant based on

achievements above targets

MOLG/LGs

Design and introduce a system of transparent penalties for late or

non-payment.

LGFC /

MOLG

Establish a unit within the District Court for the expeditious processing

of delinquent payments of taxes and duties.

MOLG/LGs

Review the LGs Act to provide greater enforcement powers similar to

those of URA

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4 Establish a revenue enforcement section to replace the former local

administration police.

MOLG

Develop and implement a revenue enhancement communication

strategy

LGFC

Implement section 12 of Local Government Rating Act for mass

property valuation

LGFC /

MOLG

Strengthen revenue management systems

Develop and implement a strategy to improve tax payer registration

and billing and overall tax administration using automated systems

LGFC /

MOLG

Set up a fund to support the implementation of automated revenue

database management systems across LGs

MOLG

Introduce new Revenue Options

Commission a study to design new revenue options including property

service tax, solid waste management tax and introducing municipal

bonds.

LGFC

Develop a policy and guidelines for introducing and managing

community contributions to service delivery

LGFC /

MOLG

Review the LG finance and accounting regulations and manual to

clarify accounting and reporting on donor flows and community

contributions

MoLG / LGBC

Revised Fiscal Decentralization Architecture (FDA)

Formally assign roles and responsibilities under the FDA OPM

Launch of the revised Fiscal Decentralization Architecture (FDA) MoLG / LGFC

Publish and disseminate the revised FDA together with guidelines on its

implementation

LGFC

Establish statutory instrument to regulate the creation of new districts

and revision of revenues sources to protect financing for local

governments

MoLG

Review the LGA and LF financial regulations to provide for

amendments to cover provisions of the revised FDA

MoLG

Undertake annual assessments of the performance of LG system

covering local government financing and service delivery based on

agreed policy targets as part of policy monitoring

LGFC

Introduce comprehensive assessments, every 3rd year, of operations of

fiscal decentralisation and LG financing to provide a basis for

renegotiation and to inform policy reform actions for the next three

years

Page a of 150 Final Draft Report

ANNEXES


ANNEX 1: SUMMARY REVIEW OF FDS

Study Theme

Study Findings/

Observation

Recommendation for Government

to take Action

Stakeholders making the stated

action/ recommendations

Implications/Benefits from implementing this

measure

Inter-governmental fiscal relations

Existing legal and

institutional mechanisms

to protect and ensure

appropriate growth of

central government

grants over time is not

being followed.

Strengthen institutional and legal

mechanisms to protect and

improve advocacy for local

government financing levels

Assessment of data on grants over

past years

Views from all LGs raising concerns

on levels of grants

Recommendations endorsed

through consultations with LG

Associations, NPA, Development

Partners, Members of Parliament

1. Strengthen the analytical function of LGFC to

prepare and provide sufficient input into a process

that protects LG financing

2. Implement a grant mechanism that includes the

participation of LGs and their input in determining

allocation parameters right from the on-set of

creation of grants

3. Move towards reducing the number of grants and

towards addressing issues of value for money and

increase in the real terms of these grants

4. Amending the law to enhance the definitions of

the grants and or provide for sharing

arrangements

Raise the profile of discussion of

local government financing issues

to Cabinet and Parliament as an

agenda item

Views from all LGs raising concerns

on levels of grants

Recommendations endorsed

through consultations with LG

Associations, NPA, Development

Partners, Members of Parliament

Amend the Budget Act to provide for the

discussion of local government financing as part of

the Budget process

Some decentralized

services under the LGA

Cap 243 are not being

implemented due to

inadequate or no

financing

For every decentralized service,

there should be commensurate

financing or others these functions

be performed by the centre

LGs: Soroti, Moroto, and in

particular, the hard to reach /

hard to stay LGs; Kalangala, raised

issues with ability to attract and

retain staff

MoPS, MoLG and LGFC will need to conduct a

comprehensive review of decentralized services

per LG and produce minimum standards and

funding requirements as to aid ideal

implementation of decentralization policy in

general


Study Theme

Study Findings/

Observation


to take Action




measure

The current grant system

is limited in addressing

local needs for sufficient

support supervision,

monitoring and

maintenance of local

investments

The Grant system should

deliberately accommodate

significant provisions for O&M, M&E

and support supervision right from

the definition of parameters and

grant guidelines. Some

investments are at presently at risk

because of the cost of repair is far

higher than what is allocated for

O&M

All LGs sampled for this study. In

particular, CAOs in Moroto, Soroti,

Kiruhura raised issue of resources

for recurrent expenses

Structured consultations with key

stakeholders endorsed the

recommendation.

More effective support supervision and monitoring

will reduce risks on investment and result into

enhanced value-for-money and increase

sustainability of infrastructure stock

There are significant

levels of financing from

the national budget for

local government

services but which do not

flow through the grant

system e.g. NUSAF

Implement a plan to transfer all

financing for LG services into the

grant system

LGFC, Sectors (Education, Water),

review of budget documents

Ensure that all financing to LGs is subject to the

same rules and a more equitable resource

allocation. This further calls for amending the aid

management manual to clarify the integration of

aid funding for LGs into the grant system

Annual Planning and Budgeting

Implement a series of

actions to make the

Harmonized LG and CG

Planning and Budget

Cycle meet critical

deadlines

Public Finance Bill should include

guidelines that ensure timely

submission of IPFs to LGs to avoid

hasty planning and budgeting

Most LGs especially, Kiruhura,

Moroto, Masindi and Arua

Municipality. Participants of

workshop at Ridar Hotel (LGFC,

MOFPED, Selected District Officials

including the District CFO Wakiso)

Starting the fiscal calendar in August for

preparation for next FY would provide more time

for planning in LGs and absorb pressures in

instances where final IPFs are delayed

The Public Finance Bill will need to include further

details pertaining to financing of LGs in general

(including the proposed FDA in this report) but

specifically on the changes to timelines provided

in the reviewed cycle. Proposed is a cut-off date

provided to sectors to submit IPFs to MoFPED is key

in ensuring subsequent timely release of IPFs to

LGs.

Review and align the LG planning Arua, Masindi, Kisoro, Oyam and Benefits


Study Theme

Study Findings/

Observation


to take Action




measure

Community Participation

in planning and

budgeting is low due to

inadequate financing of

this process (projected by

a study in 2009 to be

facing a 44% funding

gap)

Some LGs have submitted

Final Accounts showing

backlog of revenue

arrears and outstanding

liabilities

and budgeting framework taking

into account the new planning

process under the five year NDP

Lira Alignment of the overall all BFP process with NDP

monitoring framework is critical to assessment of

the overall implementation of the NDP.

Implications

NPA working with LGBC will need more support to

ensure that all LGs elaborate and adhere to their

own LG 5-year Plans and within this planning

period, LG Annual plans roll towards meeting own

targets – resulting in an improvement from the

outgoing 3-year rolling plan process

Provide further support so

strengthen theLocal Government

Budgets Committee (LGBC)

Masindi, Oyam, Arua Improving the analytical function of LGFC will

create more robust basis for LGs’ negotiation on

grants and other LG concerns that increase LG

ownership in the process. In addition review LGBC

Terms of Reference and ensure its decisions are

implemented annually in the P&B process

LGs should deliberately provide

funding for the participatory

planning process

Kisoro, Masindi, Arua, Oyam, Lira

and Soroti Municipality

Enhancement of allocations from the local

revenue pool towards support of the planning

process will improve community engagement at

the lowest levels of LGs and promote downward

accountability.

Validate and take into

consideration accounts in arrears,

outstanding liabilities and

guarantees when preparing

subsequent LG budgets

Analysis of Final Accounts of

selected LGs under the study

An overall fiscal effort that gradually reduces

arrears and LG liabilities will create LGs fiscal

balance and remove ‘past burdens’ from derailing

future local investments. In addition this would

ensure more realistic budgets are prepared

Releases, Reporting and Accountability Mechanisms

Improve timeliness of releases to

LGs to ensure that releases to LGs

are made and received within the

first month of every quarter

Arua, Masindi, Kisoro, Oyam,

Kiruhura and Lira

Timely releases will improve service delivery in a

timely fashion, streamline implementation and

contracting and minimize losses and transaction

costs


Study Theme

Study Findings/

Observation


to take Action




measure

There have been

improvements in the

release system in terms of

predictability but not in

timing and actual

amounts

There are still instances

where transfers are made

late in the financial year

leading to large unspent

balances which

according to the law

should return to central

government

While allocations reach

Districts relatively in

matter of days which is

commended, though now

the focus is improving on

release from District to

service points (facing 2-3

weeks delay).

LGs receive funds based on

approved Work-plans whether

these funds come early or late.

Retaining unspent funds within a

framework for its accountability

would be reduce transaction costs

and improve efficiencies in service

delivery while keeping unfunded

work-plans in check

All LGs. Retreat with LGFC and

selected District Officials as well as

MoFPED representatives and was

echoed at the National

Consultative Workshop

Review rules and procedures for LGs to return

unspent balances in the current Public Finance Bill

There is need for LGFC together

with the MoFPED to work out a

mechanism to allow Straight

Through Payments (STP) to be

directly to service units but still

ensure that all accounting

procedures are followed

Arua, Masindi, Kisoro, Oyam and

Lira

STP is recommended for service delivery points

however, this will need to follow through with

stricter rules for accountability on the side of

facility in-charges and the district heads of

departments in their respective sectors and

ultimately the CAO.

Sustain reforms to the OBT

and Form B

Engage sectors ministries to adopt

their reporting requirement to

Form B.

All LGs visited including sectors

notably (Gender Labour and

Social Development)

Sectors should provide more specific requirements

to be added to the Form B and to the LG-OBT

overall that meet their unique reporting needs

especially qualitative information


Study Theme

Study Findings/

Observation


to take Action




measure

Local Revenue Enhancement

There is overall

weaknesses in Local

Revenue Administration

While LST and Property tax

have high potential to

generate LRRs, they are

being undermined by

wide ranging exemptions

and political action

Some Revenues meant for

LGs are still being

collected by the Central

Government

1. In the short run, the CG will need

to invest in initiatives to improve

revenue management and tax

administration especially on

property valuation

2. A National Local Revenue Policy

needs to be elaborated to present

a framework for LRE, levies and

taxes payable and punitive

measures (including action on

political actions that deter local

revenue collection)

All LGs visited With better LRE and administration, the yield from

current revenue sources would go up from the

current 50% potential to 70-80% in the medium

term. This would overall reduce dependence by

LGs on the central government transfers for

funding and spur fiscal autonomy

Review LST and Property rates to

minimize exemptions and

implement mass property

valuation.

A caravan approach in the short

term would be required (starting

with approved plans in districts) to

cover substantial ground on

property valuation rather than

leave this process on a district per

district basis

All District Visited (especially,

Masindi, Moroto, Lira, Soroti and

Arua Municipal Councils)

Improvements will encourage all service

beneficiaries to contribute towards services they

receive, promote more equity in revenue

generation, cut down valuation time and bring

properties into tax bracket faster than present. The

yield with these improvements is projected to

reach Shs.206billion annually and would a go a

long way in closing the current LG financing gap.

Design and implement sharing

mechanism of revenues from

fishing and forestry between NFA

and Fisheries department on the

one hand and LGs

Wakiso, Namayingo, Kalangala, Allowing revenues from forestry and fisheries would

enhance greatly affected LGs’ local revenue

yields. This would enable better management of

these natural resources and stricter enforcement

of environment regulations since LGs will now be

part of the rules enforcement.

The Current legal

framework is not

supportive enough of LGs

Improvements on the Royalties Act

are needed with participation of

LGs

All LGs especially the Municipal

and Town Councils in Lira, Wakiso,

Soroti and Arua

LGs could raise an estimated shs16.5 billion from all

sources with improvements in the Act. More

effective collection of revenues from selected and

identified would be guided well with needed legal

improvements

Page f of 150 FINAL Draft Report

Study Theme

Study Findings/

Observation


to take Action




measure

Communities are more

willing to pay for direct

consumption of a service

than direct taxes

Commission a study to design new

revenue options including

property service tax, solid waste

management tax and introducing

municipal bonds.

National Consultative Workshop

(with strong submission from

Mbarara Municipality and Wakiso

District Council)

The study proposed would provide direction on

revenue options and how to improve yield on all

revenue sources for every District

It was deduced that willingness to

pay is highly linked to services

received. Develop a policy and

guidelines for introducing and

managing community

contributions to selected service

delivery units. The study has made

proposal for community

contribution in education and

health but accountability

mechanisms can be worked out

on a sector by sector basis

All districts, Consultation with UAAU

and ULGA, as well as participants

at National Workshop held in

August 2012 in Kampala

Community contribution for direct services would

not only support service delivery points financially

but would also create individual and collective

responsibility and participation in community led

development especially in health and primary

education.

Investment on community sensitization is important

as CG works out modalities for accountability for

community contributions suggested.

Proposed New Revenue

Sources

Residence Tax on permanent

houses with values above a

threshold set by individual LGs

Solid Waste Tax in Town Councils

and Municipalities

Wakiso, Mbarara and Entebbe

Municipality, Hoima (already

collective solid waste tax with

much success),

Estimated potential of over shs.90 billion in the short

term and up to 150billion in the long-term is

projected from these two sources annually. It is

also important to note that contribution

encourages downward accountability which will

result into efficient delivery of services

Revised Fiscal Decentralization Architecture (FDA)

Revise the FDA based on

findings /

recommendation of the

study

The revised FDA aims to protect

and promote local government

financing, enhancing control in

the management of

intergovernmental fiscal relations,

strengthening LG capacity for

supervision / monitoring of service

delivery and increasing discretion

in local decision making

The FDA to consists of 6 pillars;

legal and policy, revenue

assignments, expenditure

assignments, intergovernmental

fiscal relations, institutional roles

Proposals for FDA discussed and

enriched at workshops with LGFC,

LG associations and review of

literature arising from international

best practices (Kenya, Ghana,

China and Thailand) as well as

other consultative forums

Predictable, equitable and sustainable financing

of LGs and the decentralized functions according

to the LG CAP 243.

The Institutional roles will be clearer and

accountability for each will be easy and followed

up.

Sharing of nationally generated revenue between

different levels of Government will improve the

budget formulation process, ensure sustainability in

funding, focus on the O & M will be addressed and

local government issues will be discussed as the

resources going to them will be more clearer.

Page g of 150 FINAL Draft Report

Study Theme

Study Findings/

Observation


to take Action




measure

and management and

coordination: The Architecture

among other things:

Formally assigns responsibilities for

supervision / monitoring

Explores alternatives for vertical

sharing between central and LGs

namely

a) Share of National Revenue to

which a % base allocation can be

made to meet the cost of

decentralized services

b) Extent financing of LGs from a

source (just like it was with 1% of

VAT)

c) A combination of (a) and (b)


ANNEX 2: COMPENDIUM OF LEGAL FRAMEWORK FOR REVIEW

1. Article 193 of the Constitution of the Republic of Uganda

2. Local Government Act Cap 243 First, Second &Fifth Schedule

3. Public Finance Bill (Draft)

4. Local Government Act Cap Schedule No.4

5. Budget Act

6. Royalties Act

7. Local Government Finance and Accounting Regulations


ANNEX 3: LIST OF PEOPLE MET

A1 CENTRAL GOVERNMENT

Office of the Prime Minister

Timothy Lubanga Ag. Assistant Commissioner, Coordination and Monitoring

David Rider Smith Principle Advisor, OPM

National Planning Authority

L Tisasirana Executive Director NPA

DhizaalaSanon Moses Head Research, Innovation and M&E

Ministry of Finance Planning and Economic Development

Kenneth Mugambe Commissioner Budget Policy and Evaluation MoFPED

Johnson Mutesigensi Program Coordinator, FINMAP, MoFPED

Albert Musisi Acting Commissioner, Economic Development Policy &

Research

Ministry of Local Government

Eng. Andrew Kizza Principle Inspector, District Inspectorate Department

Local Government Finance Commission

Johnson Bitarabeho Chairperson LGFC

Lawrence Banyoya Commission Secretary

AshabaAheebwa Director Finance and Administration

Adam Babale Principle Revenue Officer

Johnson Gumisiriza Principle, Local Revenue

Ministry of Gender Labour and Social Development

Titus Ouma Principle Social Gerontologist

Leo Nahabago Principle Policy Analyst

John Okiror Head of Planning

Ministry of Education and Sports

Godfrey Donald Dhatemwa Commissioner Planning

Nzirwe Ester Commissioner Primary Education

Ministry of Water and Environment

Edward Masiga Budge and Monitoring

Samuel Otube Commissioner Planning

Edward Masiga Senior Economist

Ministry of Works and Transport

Eng. Kitonsa Principle Engineer

Ministry of Health

Dr. Timothy Musila Senior Health Planner

Ministry of Agriculture, Animal Industry and Fisheries

Samuel Ssemanda Commissioner Agricultural Planning, MAIIF


Uganda Road Fund

Chris Ntegakarija Technical Assistant, URF

John Ocitti Manager Fund Management, URF

Andrew Naimanye Manager Planning and Programming

A2 MEMBERS OF PARLIAMENT

Hon. Kintu Florence Chairperson Sessional Committee on Public Service

Hon. Magyezi Raphael Vice Chairperson Sessional Committee on Local

Government

A3 DEVELOPMENT PARTNERS

Alice Kenrick Governance Advisor, KfW Office

AnnetMpabulungi-Wakabi Team Leader Governance, UNDP

Martin Onyach-Olaa Senior Urban Specialist, World Bank Uganda

LivBjornestad Fiscal Economist TASU-JBSF World Bank Uganda

Jenifer Bukokhe UNCDF & Head Decentralization Donor Working Group

ParticiaAmong Internal Auditor- Irish Aid

Daniel Iga Senior Advisor Irish Aid

Tim Williamson Managing Consultant Praxis Development Consultancy

A4 NATIONAL ASSOCIATIONS

James Kiiza-Amooti Secretary General, Urban Authorities Association of

Uganda

Getrude Rose Gamwera Secretary General Uganda Local Governments Association

http://www.parliament.go.ug/mpdata/mps.hei?p=f&n=t&details=t&j=644.000000&const=Woman+Representative&dist_id=91.000000&distname=Kalungu

http://www.parliament.go.ug/mpdata/mps.hei?p=f&n=t&details=t&j=670.000000&const=Igara+County+West&dist_id=53.000000&distname=Bushenyi


B DISTRICTS

B1 DISTRICT LOCAL GOVERNMENTS

Wakiso

David KigenyiNaluwayiro Chief Administrative Officer

Stephen Kasumba District Planner

Sophia Nalukulembe Senior Finance Officer

Nixon Kyeyune District Statistician

Male Mukasa Ag. District Engineer

David Kabaale Accountant

Nathan Lujumwa A/Chief Administrative Officer

Robert Kagwire For District Health Officer

Rebecca Ssabaganzi District Natural Resources Officer

Micheal Ssekandi District Internal Auditor

James Musaazi Senior Planner

Masindi

Fred Kisembo A/ Chief Administrative Officer

Moses Kalyegira Chief Finance Officer

Wilson Isingoma District Chairman

Eng. Davis Byaruhanga District Engineer

Agaba B Rogers Principle Internal Auditor

Sam Wakabi District Natural Resources Officer

Lawrence Tusimomuhangi District Environmental Officer

DeogratiusByakagamba Senior Education Officer

ByabakamaBlazio District Planning Officer

Mugisa Julian Roads Inspector

Kugonza Mansour Department of Accounts

Magezi B G Abwoli District Planner

Julius Balikagira Ag. Senior District Planner

Moroto

Stephen Owuma Chief Administrative Officer

Francis Okwi Ag. District Agricultural Officer

Lowot Musa District Works Officer

Moses Aleper Chief Finance Officer

Kalangala

Balemezi Actual Chief Administrative Officer

Godfrey Jingo Chief Finance Officer

Mutebi Ronald District Education Officer

Dr. Hillary Bitakalabye District Health Officer

Mayingo Jimmy District Statistician

Eng. Novati M. Baliremwa District Engineer

Jude TadeoMusaazi Snr. Community Development Officer &Water

Mobilizer

Kisoro

John Okolimo Chief Administrative Officer

Dr. Stephen Nsabiyumva District Health Officer


Amos Hakizimana Speaker of Council

VicentMudanga District Natural Resource Officer

Nvuriye S. G Principle Accountant

AnatoliNkusi Head of Finance

Godfrey Kagaba Senior District Accountant

Francis Bainemaana District Planner

John Banzubaze Superintendent of Works

Richard Ssemucyo Senior Accountant

Mpigi

Ssekalegga Joseph District Works Officer

K. E. Namanya Chief Finance Office

Dr. Nansanga District Medical Officer

JascentNdangire District Education Officer

Paul Kirabira District Planner

WycliffNdagire A/Chief Finance Officer

Soroti

Emmanuel Wakwesa Assistant Statistician

Okello C A Chief Administrative Officer

Justine Opolot Chief Finance Officer

Ajotu Benjamin District Veterinary Officer

Ejura Martins Assistant District Health Officer

Jane Akiror A/Chief Administrative Officer

DonathEswilu Ag. District Chief Administrative Officer

OunoEtoyu District Education Officer

Margaret E. Acaya District Community Development Officer

Onega Opio Ag. District Engineer, Soroti Works Department

Kapchorwa

Omuge George William Chief Administrative Officer

Franklin Cheptoyek Ag. District Engineer

Olal David William District Water Officer

Patrick Mangusho Head of Finance

Andrew Teko District Planner

Michael Cheptoek District Education Officer

ChekwuruiSemu Albert District Community Development Officer

Namayingo

Kaleeba Peter A/Chief Administrative Officer

Dr. Patrick Magoola District Health Officer

Godfrey Kirya Ag. District Engineer

Muganza Emmanuel District Natural Resource Officer

KaawoKawere District Education Officer

Fred Igoma DPO

Michael Bwamuki District Health Educator

Fred Omanyaala Population Officer

Mayende A District Accountant

Peter Kaleeba A/Chief Administrative Officer

Page f of 150 FINAL Draft Report

Betty MubiitaNandudu District Community Development Officer

Arua

Draku Anson Abamil Senior Assistant Engineer, Arua

ShaphanAndeku District Planner

Wadri Sam Nyakua Chairman

Ronald Dravu Principal InternalAuditor

Roy Angumaniyo Senior Accountant

Oyam

Robert Charles Ogwang A/Chief Administrative Officer

Okello Norman Oduka District Education Officer

Moses Opio District Natural Resources Officer

Omor Charles Acting Chief Finance Officer

Wallace Adimo District Road Inspector

Patrick Okwir Assistant Water Officer

John Mark Agong District Planner

Luwero

Florence Namubiru Ag. District Auditor

Charles Luzze Ag. District Planner

Florence Katasi District CDO

Dr. Namugezi G Agricultural Production Officer

TeopistaGateese Senior Environment Officer

Geoffrey Walakira Senior Accountant

William Kibirige Accountant

SandeKyoma Chief Administrative Officer

Segawa G Chief Finance Officer

Ivan Serwambala Engineer Works

Amos Kalema A/Chief Administrative Officer

Francis Kyeyune Ag. Deputy CAO

Edith Nakigudde Senior Community Development Officer

Rev. Serwambala C District Education Officer

Kiruhura

Joseph Chief Administrative Officer

Mwebaze Emmanuel District Water Officer/Engineer

Dr. David Kamya District Health Officer

William Rwanyarare Senior Officer in Civil Works Department

Patrick Muhoozi District Finance Officer

B2 MUNICIPAL COUNCILS

Entebbe Municipality

David KyambaddeMulyabitte Deputy Town Clerk

FreddrickKaweesiMutagubya Chief Finance Officer

Ssemombwe N Joseph Senior Economist/Planner

Samson Semakula Municipal Agricultural Officer

Nkuubi Luke

Ssemombwe J Senior Economist

Joseph MukiibiKiwanuka PEE

Page g of 150 FINAL Draft Report

Pamela Kobusingye Procurement Officer

Dr. Kalyesubula John Municipal Health Officer

Arua Municipal Council

BoscoAsega Internal Auditor

Charles Bithulu Ag. Chief Finance Officer

Marshal Anguyo Statistician

Fred Bada Senior Planner

Lira Municipal Council

Awio Patrick Principle Treasurer

David Bagenda Municipal Engineer

Soroti Municipality

Monday Richard Town Clerk

John BoscoOjur Ag. Medical Officer of Health

Abraham Oryokot Principle Treasurer

Stephen Enou Chief Finance Officer

Masindi Municipality

Fredrick Isingoma Senior Assistant Town Clerk

B3 TOWN COUNCILS

Mpigi Town Council

Ssendagire. W Head of Finance

Susan Nakitende Senior Accounts Assistant

Edward Kigozi CDO Mpigi Town Council

Namayingo Town Council

Charles Lubaale Accountant

Douglas Barasa Accounts Assistant

KakaireSwaliki Accounts Assistant

WiberforceWalukano AASP (Crop Husbandry)

Enock Waiswa E/Accounts

Douglas Barasa Ag. Town Clerk

Kiruhura Town Council

Joseph Turyaija Senior Accounts Assistant

Kapchorwa Town Council

Chelomo Alex Town Clerk

B4 LOWER LOCAL GOVERNMENTS

Kammengo Sub County - Mpigi

Patrick Kakooza Senior Accounts Assistant

IdrisWalugembe Community Development Officer

Acaba Sub County Oyam -

Denis Ogo Sub-County Chief

Justine Ogwang Health Assistant

Patrick Obong Bonny A/Community Development Officer

Charles Owinya Accountant

Buswale Sub County - Namayingo

OumaLeudy Sub County Chief

Nadunget Sub County - Mororo

Naru Gertrude Sub County Chief

JenifferAkot Community Development Officer

Wakiso Sub County – Wakiso

Page h of 150 FINAL Draft Report

Nakirya Harriet Senior Accounts Assistant

Nakyazze Emily Community Development Officer

Logiri Sub County – Arua

Draku Anson Abamil Senior Assistant Engineer, Arua

Kamdini Sub County- Oyam

Robert Okello Sub-Accountant

C SERVICE DELIVERY POINTS

Primary Schools

Barnabas Katumba Headmaster Chadwick Namate Primary School, Entebbe

Richard Odongo Deputy Head Teacher Ambalal Primary School, Lira

Hosea Kiiza Head Teacher Kichandi C.O.U Primary School, Masindi

David Adea Head Teacher Wigweng Primary School, Oyam

Akongo Jane Head Teacher Kichinjaji Primary School Soroti Municipality

HellenAmulenAligoi Head Teacher Nadunget Primary School, Moroto

RobinaBulya Head Teacher Bessania C.O.U Primary Schoool, Mpigi

Bernard Makubuya Head Teacher Buswa Primary School Kalangala

Christopher Niringiye Head Teacher, Sseseme Integrated School Kisoro

Christine Akol Head Teacher, Kaswa Primary School Kiruhura

James Kizito Head Teacher Kifuyo Primary School Namayingo

Godfrey Chepkurui Head Teacher Kaplelko Primary School Kapchorwa

Head Teacher Arua Public Primary School

Health Units

Dr. Agaba In-charge Luwero Health Centre IV

Erasmus Chemunumwa KaplilkoHealth Centre II, Kapchorwa

Maureen Nampijja In-charge Bwendero Health Centre IV, Kalangala

Dr. Iraku E.U.K In-charge Oli Health Centre Arua Municipality

Albert Nuwagira Records Assistant Kiruhura Health Centre IV

Nelson Nturu In-charge Lira Municipal Council Health Centre II

AngelloHarera Senior Clinical Officer, Nyabihuniko Health Centre III

Tile Kalisto Medical Clinical Officer, Anyeke HC IV Oyam

RobinahKugonza Kigungu Health Centre III, Entebbe Municipality

JesperOnyamasi In-charge Nadunget Health Centre III

Janet Namutebi Nursing Assistant Mihembero Health Centre II, Masindi

Irene Aguti Snr. Medical Officer Kichinjaji Health Centre III Soroti

Municipality

Water Points visited

Namayingo Borehole at Kifuyo Primary school

Kisoro Gravity flow Tank in Chahi Sub County

Masindi Rukondwa and Kiima Water Points

Kiruhura Rwabigyemano Water Dam

Oyam Alyek Deep Well in Aber Sub county

Arua Anzeru and Ejupasi Boreholes

Lira Municipality Water point at Municipal Market

Wakiso Borehole near Health Center III Wakiso Sub County

Road Works visited

Namayingo Bulamba and Malendele Road works

Page i of 150 FINAL Draft Report

Lira Independence Road in Lira Municipality

Kalangala Kalangala in-land Road works

Kisoro Murrum Roads in Chahi Sub-County

Kiruhura KirengaNgiraKanyanya Road

Arua Lazebo-Oliba Road in Logiri Sub county

Masindi Municipality Road repairs

Masindi PakanyiNakalongo Road Repairs

Arua Piida-PeOpok Road in Kamudin Sub County and David

Kolo Old Bridge to tarmac under UNRA & District LGMSDP

Page j of 150 FINAL Draft Report

ANNEX 4: LIST OF DOCUMENTS REVIEWED

1. ACODE (2010) Uganda Local Government Council Score-card Report 2008/9: A

Comparative Analysis of findings and Recommendations for Action; ACODE Research

Series No. 32, 2010

2. ACODE (2011) Uganda Local Government Council Score-card Report 2009/10: Political

Accountability, Presentation and the state of service delivery; ACODE Series No. 42, 2011

3. Advanced Project in Management and Policy (2010): Local Government Fiscal discretion

in Uganda

4. Annual reports on sector conditional grants negotiations and review of guidelines

5. Arua District Local Government (2010/11) Local Government Finance Commission:

Submission of Final Accounts for the year ending June 30th 2011

6. Arua District Local Government (2010/11) Local Government Finance Commission:

Submission of Budget Framework Paper for the year ending June 30th 2011

7. Draft Policy Paper on the Transformation of the Uganda Public Service (2010)

8. Draft Public Financial Management Strategy for Uganda

9. Fiscal Decentralization Working Group Report 2002

10. Global Forum on Local Development (2010) Pursuing MDGs through local development

Kampala

11. Hard to reach Policy by Ministry of Public Service (2010)

12. Kalangala District Local Government (2010/11) Local Government Finance Commission:


13. Kalangala District Local Government (2010/11) Local Government Finance Commission:


14. Kapchorwa District Local Government (2010/11) Local Government Finance Commission:


15. Kapchorwa District Local Government (2010/11) Local Government Finance Commission:


16. Kiruhura District Local Government (2010/11) Local Government Finance Commission:


17. Kiruhura District Local Government (2010/11) Local Government Finance Commission:


18. Kisoro District Local Government (2010/11) Local Government Finance Commission:


19. Kisoro District Local Government (2010/11) Local Government Finance Commission:


20. LG PEFA Study (2005)

21. Lira District Local Government (2010/11) Local Government Finance Commission:


22. Local Government Act (CAP 243)

23. Local Government Country Integrated Fiduciary CIFA Assessment 2004

24. Local Government Finance Commission: The Fiscal Decentralization Strategy Paper 2002

Kampala

25. Local Government Public Financial Management Assessment 2005

26. Luwero District Local Government (2010/11) Local Government Finance Commission:


27. Luwero District Local Government (2010/11) Local Government Finance Commission:


28. Masindi District Local Government (2010/11) Local Government Finance Commission:


Page k of 150 FINAL Draft Report

29. Masindi District Local Government (2010/11) Local Government Finance Commission:


30. Ministry of Finance Planning and Economic Development (2001): The Budget Act 2001;

Kampala

31. Ministry of Finance Planning and Economic Development (2011) Guidelines for budget

preparation and reporting using Local Government Output Budgeting Tool (LGOBT),

Kampala

32. Ministry of Health (2011) Health Sector Strategic Plan 2010/11-2014/15 and Investment

Plan: Promoting people’s health to enhance socio economic development Kampala

Uganda

33. Ministry of Local Government (2006) Local Government Sector Investment Plan Kampala

34. Ministry of Public Service (2010) Assessment of the impact of hardship allowance on

attraction and retention of staff in ‘hard-to-reach’ areas Kampala

35. Ministry of Public Service (2010) Circular Standing Instructions No. 2 of 2010: Payment of

hardship allowance in ‘hard to reach’ areas PMD 80/80/02 Kampala

36. Ministry of Public Service and Ministry of Local Government (2009) Final Report: Joint

Review of the Pilot of Local Government Client Charters under 9th EDF Support to

Decentralization Program

37. Moroto District Local Government (2010/11) Local Government Finance Commission:


38. Moroto District Local Government (2010/11) Local Government Finance Commission:


39. Mpigi District Local Government (2010/11) Local Government Finance Commission:


40. Mpigi District Local Government (2010/11) Local Government Finance Commission:


41. Namayingo District Local Government (2010/11) Local Government Finance Commission:


42. Namayingo District Local Government (2010/11) Local Government Finance Commission:


43. Oyam District Local Government (2010/11) Local Government Finance Commission:


44. Report on the Development of a Strategy to Implementation of PFM systems in Local

Government in Uganda 2007

45. Republic of Uganda (2010) National Development Plan (2011/12- 2014/15) Growth,

employment and socio economic transformation for prosperity Kampala

46. Sector Budget Support in Practice

47. Soroti District Local Government (2010/11) Local Government Finance Commission:


48. Soroti District Local Government (2010/11) Local Government Finance Commission:


49. The Joint Assessment Framework (JAF 1-3)

50. The Local Government Finance Commission Act 2003

51. The Public Finance and Accountability Act

52. Uganda Bureau of Statistics (2011) District Population Profile of 2011, Kampala

53. UNDP (2005) Fiscal Decentralization and Poverty Reduction

54. Wakiso District Local Government (2010/11) Local Government Finance Commission:


55. Wakiso District Local Government (2010/11) Local Government Finance Commission:


56. WB Local Government Fiduciary Risk Assessment (2004)

Page l of 150 FINAL Draft Report

Documents

Review of Local Government Financing Study Repor… · · 2016-08-02Review of Local Government Financing ... 9.2 Uganda’s Policy of Decentralisation and its challenges ... There