Report: Low revenue crippling local govts

NEWS FEATURE

By Moses Walubiri

A new report has exposed the financial and manpower inadequacies facing local governments, which undermine the essence of decentralisation policy.

Government introduced the decentralisation policy over 10 years ago, as a core component of devolution of power, to promote development at the grassroots.

The report by EFICON Consulting, a consultancy firm based in Kampala, undertook a review of local government financing, focusing on adequacy, effective management, enhancement of local revenue and accountability.

The study, which was carried out in 13 districts, five municipalities, four town councils and seven sub-counties, reviewed all local government sectors, with emphasis on education, health, water and roads sub-sectors. The districts covered were Wakiso, Masindi, Moroto, Kalangala, Kisoro, Mpigi, Soroti, Kapchorwa, Namayingo, Arua, Oyam, Luweero and Kiruhura, while town councils included Entebbe, Arua, Lira, Soroti and Masindi.

The report highlights the financial constraints in the sampled districts, blaming the problem on dependency on central government funding. Following the abolition of Graduated Tax in 2008, the report notes that operations of local governments have become almost impossible, without grants from the central government.

After scrapping graduated tax, the Government introduced compensations to local governments, amounting to sh34b per annum, for all local governments, “creating an annual shortfall of about sh71b.”

Even the introduction of hotel tax and local service tax could not help the situation. The report labels the sh6b realised from both taxes as meagre, on account of a sh97b annual shortfall occasioned by graduated tax abolition.

The report bemoans government’s failure to redeem its promise to remit tax proceeds from VAT increment (from 17% to 18% since 2006) to local governments as part of its resolve to cure chronic financial problems.

It also attributes local governments’ financial woes to failure by the Government to match the increase in the national budget (from sh2.9 trillion in the 2003/4 financial year, to sh10.1 trillion in 2012/13) with increment in grants to local governments.

“After the suspension of graduated tax, local government revenues plummeted and over the last six years, districts have been relying on the centre for financing. This makes distant the reality of real fiscal autonomy, a fundamental basis for the decentralisation policy,” the report notes.

According to the report, since 2001/02, the central government grants have become the main source of revenue for local governments, accounting for over 95% of their revenue.

“Failure to address this funding gap has affected the quality and quantity of services provided,” the report notes.

It also underscores the negative spiral effect in terms of incompetent administration and “service delivery gaps” occasioned by chronic underfunding. According to the report, many local governments lack staff to man their administrative structures.

The problem is compounded in districts, which are split to create new ones, leaving skeletal staff structure in mother districts.

For instance, Bwendero Health Centre III in Kalangala district has only six, out of the 19 staff required to operate optimally.

Among core health activities that have suffered the brunt of poor funding in Kalangala is immunisation, which is carried out on a quarterly basis, instead of monthly.

The report also highlights overcrowding and poor facilities in many health centres, with prescription for diseases like malaria at Diana Health Centre IV in Soroti, premised on assumption due to absence of laboratory services.

The report attributed the challenges facing Universal Primary Education to poor funding, referring to the sh7,000 capitation grant given to every student per year as meager. It labels the failure to synchronise the release of capitation grant with the school term system as a failure of judgment.

According to the report, local governments also face a problem of poor accountability, noting that politicians and technocrats feel more accountable to the central government, which foots their salaries.

To stem the financial woes in local governments, the report proposes a multi-pronged approach, aimed at expanding the revenue base, mainly through taxation. The mooted new taxes include property service tax (PST), solid waste management tax and a residence tax, which, if implemented, are projected to “generate about sh30b from about sh3m houses in the country.”

The report wants property tax to range between sh30,000 and sh100,000 annually, payable on a quarterly basis.

To promote tax collection efficiency, the report proposes a threshold of an annual income of sh1m, coupled with enforcement powers to local governments “to attach properties of defaulters and bank accounts.”

The report, which was commissioned by the local government finance commission and finance ministry, is currently before Cabinet for approval.