Scheme

118 Jesper Steffensen

The reform under the recurrent transfer scheme includes the following main activities:

Review sector policies to ensure adherence to the overall decentralization objectives and to enhance local government autonomy and flexibility in the use ofgrants (2003/04). Review allocation criteria to make them more transparent, poverty sensitive, and needs based and to make them more closely related to sector objectives (review 2003/04, expected implementation from 2005/06, according to interviews with the Local Government Finance Committee).

The criteria will make significant changes in the allocation across districts. Reduce the number ofgrants, to enhance allocative efficiency and local government autonomy. The grants will be grouped in six or seven sectors to establish common modalities, reporting systems, and so forth. Within each grant, budget lines will determine the spending on various items, especially development (ifrelevant), recurrent nonwage parts, recurrent wage parts, and projects (such as the National Agriculture Advisory

Service), but the number ofthese earmarked areas will be kept to the bare minimum to ensure sufficient flexibility. Create flexibility in the use ofthe grants. In 2004/05 (2003/04 for the pilot), local governments will be allowed 10 percent flexibility in the nonwage parts ofrecurrent grants within and across the Poverty Action Fund sectors (health, education, agriculture, roads, and water). Ensure future links between local government performance and the autonomy over and size ofthe grants. Systems are being elaborated to increase flexibility with improved local government performance, rewarding governments that perform well in terms ofgeneric administration (planning, budgeting, accounting, transparency, and so on) and sanctioning the nonperformers. Over time, these systems are expected to affect the size ofthe allocation as well, and they already apply for the

Local Government Development Programgrants.

This problem was the major reason behind the launching ofthe fiscal decentralization strategy (FDS) (MoFPED 2002).A comprehensive reform ofthe entire system offiscal transfer,started in FY 2003/04,was piloted in 15 local governments and then rolled out in all district and city councils in 2004/05.The FDS is aimed at reducing local government transaction costs and improving allocation efficiency,autonomy,and accountability.Box 3.2 describes the main reforms to the recurrent grant system.

BOX 3.2 Fiscal Decentralization Strategy: Recurrent Transfer Scheme

(Box continues on the following page.)

Local Government Organization and Finance: Uganda 119

Improve and simplify the reporting and monitoring systems. Common formats and reporting modalities have been elaborated for all grants to reduce the administrative costs ofcompliance. Improve planning and budgeting guidelines. Guidelines to enable the local governments to use the increased flexibility and the new fiscal decentralization strategy reforms have been developed, and local governments have been trained in their use. Improve central government coordination ofthe monitoring and mentoring oflocal governments through two committees, the Local Government

Budget Committee and the Local Government Releases and Operations

Committee, with representation from key ministries and local governments and involvement and participation oflocal government representatives in all the above-mentioned initiatives. Increase focus on local government revenue-raising efforts through the budgeting process and the performance-based allocation system. The effect ofthe tax effort on the size ofthe grants is still limited to the local development grant, but such revenue-raising efforts are being considered for extension to other grants as well.

Source: Steffensen and Tidemand 2004.

Development grants For various reasons,the decentralization ofdevelopment assignments (and related grants) started late in the process offiscal decentralization,but it has been stepped up in recent years.Development grants have increased from 1percent oftotal transfers in 1997/98 to 25 percent in budget 2003/04.Total development grants amount to US$4 per capita.The discretionary nonsectoral development grants account for 37.3 percent ofdevelopment grants and 9.5 percent ofall grants to the local governments (Steffensen,Tidemand, and Ssewankambo 2004,annex 4.10).The remaining development grants cover education (the school facility grant),health,water,roads,and agriculture (table 3.5).

Table 3.5 shows that,in the increasing share ofthe development grants in the total transfers to local governments,nonsectoral discretionary development grants are gradually gaining in relative importance,together with the earmarked funding ofagriculture activities.This trend indicates an increased fiscal decentralization,but a decentralization that has hitherto not been matched by increased flexibility in recurrent grants (which have been increasingly earmarked and sectoral).

Sector development grants are typically earmarked for development investments within the sectors.Nonsectoral grants have interesting