Overall Assessment and Lessons

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Overall Assessment and Lessons

The experiences from fiscal decentralization provide important lessons for reforms that strengthen the financing ofdecentralized services.

Experience shows the importance ofhaving a clear delineation ofexpenditure assignments and a recognition that decentralization ofresponsibilities must be accompanied by sufficient resources to finance activities.The LGA has been instrumental in this respect,but the tasks and functions ofthe administrative units (parish and villages) have not been clearly delineated. Furthermore,attempts to cost the decentralized services were made very late in the process,and a number offunctions have been transferred without adjusting the general funding flow or tax assignments (leading to unfunded mandates).

Experience shows the importance—but also the severe difficulties—of developing a sustainable system oflocal government finance with a significant component ofown-source revenues to ensure accountability,ownership,efficiency,and the long-term viability and legitimacy ofa decentralized system.A number offactors have constrained the mobilization ofown-source revenues: lack ofa favorable legal framework for local government taxation (especially concerning the property tax),19 weak local government capacity in tax administration,and lack ofcentral government support (moral and technical) for boosting local government revenue mobilization.More recently,the large increase in transfers from central to local government seems to have had a crowding-out effect,worsened by strong influence and interference from the top political layer.What the president says during the presidential election campaigns matters in local tax policy,and there is still a lack ofa perceived link between tax payments and service delivery benefits.In a situation in which transfers constitute more than 85 percent ofall local revenue sources,there have been limited incentives to focus on the smallest part.20

Experience also shows a need for concerted efforts—targeting the legislative framework,the capacity oflocal governments,awareness raising and links to citizens,and especially incentives in the grant system—to significantly increase local governments’own-source revenues.This effort should be combined with a higher level offairness and equity in the tax collection and legislative framework and with more efficient use ofthe resources collected.

Local governments that are highly dependent on the central government are especially vulnerable to central government control.There is a risk ofreduced ownership and efficiency in local government service provision ifthis process is not fundamentally reversed.The challenge is to launch technical measures supported by political guidance in a clever and sensible way,

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without distorting economic activities and compromising poverty concerns. Without strong,top-level political support for local government revenue raising,any technical initiative will probably be in vain.

The elaborate system ofrevenue sharing has ensured that the lower levels oflocal government have had funding for political activities and some minor service responsibilities.However,the system has not always been adhered to,and it has also led to fragmentation and limited resources for meaningful investments,conflicts between layers oflocal governments,and waste offunds in areas where lower local governments have less capacity. There has been a tradeoffbetween involvement and democratization on one hand and economies ofscale,efficiency,and capacity on the other.

Uganda’s experiences with developing intergovernmental fiscal transfers are unique,especially because ofthe link between the HIPC initiative, the PAF (ring-fencing offunds for poverty targeted services),and the decentralized system,with local governments as the main institution for service delivery.The conditional grant system is used as an instrument to channel a large increase in funds for service delivery and to ensure that funds are used in key target areas for poverty alleviation.However,strong earmarking of funds also entails pitfalls and costs in compromised downward accountability and high administrative transaction costs from multiple planning, accounting,banking,and reporting systems.

The main lesson is the importance ofstriking a balance between (a) the need for central government control and monitoring ofthe achievement of national targets and (b) autonomy for the sake ofdemocratization plus efficiency in local priorities and downward accountability.The balance in Uganda tipped toward control and monitoring—hence the need for the fiscal decentralization strategy in 2002 to address the problems.The FDS is supposed to reduce conditionality and strict control,thereby allowing flexibility in the use offunds across sectors and the establishment ofbetter incentives to improve performance.However,a better balance and delineation ofareas to be covered by unconditional and conditional grants should be pursued,closely linked to the type ofservices the local governments are to perform (delegated and agent functions,devolved functions,and so forth).

Uganda is one ofthe first countries in Africa to introduce an equalization grant scheme.The lesson has been that the scheme will continue to have a marginal role unless (a) grant objectives are clarified,(b) grant funding is concentrated on the most needy local governments,(c) the scale ofthe grants is increased,(d) grants are better linked with the conditional grant

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criteria and schemes (which in some cases equalize as well),and (e) data are updated and improved.

Experience with the grant system has proven the importance ofclear and transparent allocation criteria,as well as timely and predictabletransfers from the central government to the local governments.Although there is still room for improvement,the grant system has improved significantly over the past decade in these respects,increasing the likelihood that local governments will plan,budget,and implement projects.Synchronizing the transfer schemes with the local government budget cycles and well-known indicative planning figures (with a certain predictability) has provided support for hard budget constraints where local priorities are set,moving away from the previous wish-list approach.

The piloting ofnonsectoral development grants that are based on local government performance provides important positive lessons.Experiences have shown that when local governments are provided with the proper incentives and support systems,including mentoring and capacity-building support,they can address urgent local service needs by using nonsectoral discretionary development grants.In fact,more than 90 percent ofnonsectoral funds have been used within the five priority sectors for national poverty alleviation (education,health,water and sanitation,roads,and agriculture).

A positive side effect has been gradually improved administrative procedures and financial management systems and practices,improvedtransparency, and good governance,although there is room for further improvement. Performance-linked incentives can lead to significant improvements in the quality oflocal government processes.The lessons learned from carefully designed grant systems that link the size ofthe grants to local government performance are very promising.Such incentives have been successfully piloted in other parts ofthe world as well (Shotton 2004;Steffensen and Fredborg Larsen 2005).There seems to be scope for further testing ofthese incentive systems within other grant schemes as well,allowing more flexibility and autonomy while enabling improvements in performance and capacity.

Another positive experience has been the attempt to mainstream the vast number ofdistrict support programs with government procedures, bringing the programs on budget and harmonizing grant flow modalities. Doing so has reduced transaction costs and provided a better overview of the areas in need ofadditional support.Experiences from the pilot schemes have been useful in the national scaling-up ofarea-based systems.

There has been a lack ofsufficient hard budget constraints on the use of funds,which is linked to the lack ofincentives to mobilize own-source revenue.

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Although there is limited official borrowing,many local governments tend toaccumulate liabilities and to neglect operational and maintenance obligations.The problem arises because ofa technical need for more operational commitment control systems and a need for stronger incentives to mobilize the required resources on time.It also suggests the need for better oversight and control functions (internally as well as externally).

Financial management performance in all phases,from planning to audit follow-up,is an area ofgreat concern.Improving performance requires a sustained transformation process with continuous efforts and institutional,technical,and structural reforms.Capacity-building and technical tools such as computers and information technology systems are not sufficient alone;they should be combined with incentives for institutions and individuals to improve performance and a stronger focus on downward accountability.Promising steps have been taken in recent years to involve citizens more,through open planning and budget conferences,notice boards with information on the receipt and use offunds,involvement ofcitizens in project implementation committees and LGPACs,and so forth.However, this area still has great future challenges and needs further attention.

Hitherto,the grant system (except the LGDP) has focused very much on upward accountability (reporting).However,experience has shown that building local accountability is equally important.Ideally,downward accountability should develop automatically as part ofthe day-to-day interaction between politicians and citizens.However,in the absence ofa strong civil society and under the prevailing unbalanced relationship between local government and citizens,the central government can promote,catalyze,and facilitate improved downward accountability by demanding or promoting dissemination ofinformation on local government finance,priorities,and use offunds;participatory planning and budgeting;open meetings;and so forth.These actions may create a positive circle in which disseminating more information to the public leads to more citizen demands.Although this effort will take time,emerging trends show improvement.

National monitoring ofdevelopments in local government expenditure and revenues has been problematic because ofthe fragmentation ofdatabases and the lack ofreliable data on local government finance.Fixing these problems should be pertinent first steps in any reform process,to provide a sound basis for making decisions.Initiatives are under way in the LGFC and MoLG to address this gap.

The lessons from Uganda show the value ofa clear fiscal decentralization strategy and coordinating institutions.The 2002 FDS,with its implementation arrangements (budget,account,and revenue enhancement