Improving Local Government Finance And Local Economic Development In Ghana: Twenty Five Years Of Stocktaking

By: J . F . T Awaitey  & E. Oduro Osae
Ghana has gone through several stages in her agenda in local government    development.  The post –colonial era witnessed the creation of district councils    which existed as deconcentrated local government units operating within a   strong centralised unitary state. There were sixty-four (64) district councils before the  creation of Metropolitan/Municipal/District Assemblies (MMDAs).

In 1988, Ghana embarked on local government reforms with the introduction of a policy of decentralisation which led to the establishment of one hundred and ten (110) MMDAs.  Administrative and political decentralisation were  achieved with responsibilities transferred to the local government units. There was therefore the need to transfer financial resources and /or empower the   MMDAs to generate revenue to undertake the various functions transferred to    them under the new decentralisation programme with the ultimate objective of promoting development through the provision of infrastructure and delivery of efficient services.   This called for a sustainable fiscal decentralisation regime.

Legal Framework for Local Government Finance

In 1992 Ghana adopted a Constitution which, for the first time, made provision for the  decentralisation of the administrative machinery of government which also  included fiscal decentralisation  measures. Article 240 (2) (c) states that “there shall be established for each local government unit a sound financial base with adequate and reliable  sources of revenue”.   Further, Article 245 (a) (b) has empowered the MMDAs with “the formulation   and execution of plans, programmes and strategies  for the effective mobilisation of the resources necessary for the overall development of the  district” as well as “the levying and collection of taxes, rates, duties and fees”.

Thus the MMDAs have become rating authorities under the 1992 Constitution. This position became strengthened with the enactment of the  Local Government Act, 1993 (Act 462) which ceded the devolution of financial  powers to district assemblies.

Resource transfer from the Central Government to the local government units has also become an important feature of  the 1992 Constitution. Article 252 of the 1992 Constitution made provision for the establishment of the District Assemblies Common Fund (DACF) whereby at least 5% (increased to 7.5% in 2007) of national tax revenue is pooled and released to the MMDAs on quarterly basis for development.  The provision has also been made for other transfers from State Agencies and other bodies to  the Local Government Units thereby diversifying sources of  resource mobilisation of District  Assemblies.

The DACF commenced operations in 1994 with the promulgation of the  DACF Act, 1993 (Act 455) enacted to operationalize Article 252 of the Constitution.  From 1994 to 2013 total disbursement of the DACF amounted to   GH¢3,824,004,921.  In 2014 alone, it was estimated that an amount of GH¢1370 Million would be transferred to the DACF(source : office of the DACF and Budget statement and Economic Policy for the 2014 Financial Year ) Following the enactment of the above laws,, some pieces of legislation were passed to regulate    resource mobilisation and financial management of MMDAs generally. Some   of them are listed below:

1. National Development Planning (System) Act, 1994 (Act 480).
2. Office of Administration of Stool Lands Act, 1994  (Act 481).
3. Audit Service Act, 2000 (act 584).
4. Financial Administration Act, 2003 (Act 654).
5. Internal Audit Agency Act, 2003 (Act 658).
6. Public Procurement Act, 2003, (Act 663).
7. Financial Administration Regulations, 2004 (LI 1802).
8. Financial Memorandum for Metropolitan/Municipal/District Assemblies, 2004 (Gazette No. 35).
9. Lands Commission Act, 2008 (Act 767);

Policies And Programmes Implemented To Improve Local Government Finance

Several policies and programmes have been initiated and /or implemented within the period under consideration with a view to improving municipal finance and deepening fiscal decentralisation. The major ones have been  highlighted as follows:-

1. In September 2000 a Fiscal Decentralisation Project had been established with support from the Canadian International Development Agency (CIDA). This project developed a Decentralisation Road Map towards operationalising fiscal decentralisation in Ghana.
2. Following the CIDA Project came in a Decentralisation Action Plan (DAP) in 2006 which took its roots from the Fiscal Decentralisation Project.  The outcome of the DAP was the establishment of a Municipal Finance and Management Initiative (MFMI) which was financed by World Bank through Cities Alliance.  The MFMI produced a draft Local Government Finance Bill which was submitted to Parliament in 2008. Earlier on a Decentralisation Secretariat was established within the Ministry of Local Government and Rural Development (MLGRD) to co-ordinate decentralisation reforms.
3. In 2007, the DACF was increased from 5% to 7.5% of total revenues of Ghana.
4. The District Development Facility (DDF) was also instituted with support from development partners in 2008 to provide additional financial resources to MMDAs using a performance-based system of assessment (Functional Organisational Assessment Tool – FOAT).
5. In order to deepen and advance decentralisation, a new Decentralisation Policy Framework within an Action Plan was formulated with a new thematic area focussing on Fiscal Decentralisation.  The outcome was the publication of a Composite Manual and the implementation of the Composite Budget for the first time by MMDAs nationwide in 2012.  All disbursements under the Composite Budget System are to be covered by a warrant authorised by the Metropolitan/Municipal/District Chief Executives and Metropolitan/ Municipal/ District Co-ordinating Directors (the Vote Controllers and Spending Officers respectively).
6. Then in 2011, a $175 million Local Government Capacity Support Project (LGCSP) with funding from the World Bank was set up to, among other things, improve capacity building in financial management of 46 Metropolitan and Municipal Assemblies then in existence.  The Urban Development Grant (UDG) was also introduced to improve the finance of Municipal and Metropolitan Assemblies. It was a five (5)-year project which provides financial resources to urban assemblies based on the performance rating of those assemblies on similar lines like the FOAT.
7. An Inter-Governmental Fiscal Framework (IGFF) was approved by Cabinet in 2014 for implementation.
8. The Ghana Urban Management Pilot Project (GUMPP) has been formulated to pilot municipal finance initiatives in four (4) local government units, namely, Kumasi Metropolitan Assembly (KMA), Tamale Metropolitan Assembly (TAMA), Sekondi-Takoradi Metropolitan Assembly (STMA) and Ho Municipal Assembly (HMA).
9. It is anticipated that the draft Local Government Finance Bill will be resuscitated in 2015.
10. A number of Financial Management Strategy Papers for Local Government have been introduced by the FDU of MOF to improve municipal finance in 2014.
11. In order to improve accounting processes and procedures, a new Local Government Accounting Manual has been introduced.

l. GIFMIS has been piloted in seven (7) MMDAs

Budget Transfers From Central To Local Governments :

Annual budgetary transfers from the Central Government to local  Governments for the past two decades range, between an average of 50% and 60% of the MMDAs’ budgets.  These transfers comprise salary  grants, programme/project-specific grants and district-specific expenditure outlays e.g. for provision of water, irrigation schemes, health sanitation and education facilities, etc.

Local Economic Development Policy For Local Government

The Government of Ghana has put a premium on Local Economic  Development (LED) as one of the growth poles for accelerated development of the country as a whole. To achieve this objective, a policy has been developed on LED and a manual published to that effect.  The policy has been pre-tested successfully in two (2) regions – Central and Western  Regions of Ghana.Again, in order to achieve the above objective, the National Development Planning Commission (NDPC) has directed all MMDAs to mainstream LED issues into their District Medium Term Development Plans (DMTDP).

Growth Trends In Local Government Finance In Mmdas

Between 2010 and 2011 Internally Generated Fund (IGF) of MMDAs grew by 22%, i.e. from GH¢89,439,529.00 in 2010 to GH¢109,528,032 in 2011 .However, between 2011 and 2014 IGF grew at a decreasing rate from 15.38% in 2012 to 1.86% ( projected)  (see Table I below).

TABLE I: GROWTH OF INTERNALLY GENERATED FUND (IGF) OF METROPOLITAN/MUNICIPAL /DISTRICT ASSEMBLIES (2010-2012

Source: 2015 Budget Statement and Brochure of 2014 IGF Conference.

Though we observe a positive growth rate in the IGF collected in absolute terms between 2011 and 2013 and the growth pattern projected into 2014, in real terms the growth could have been negative but for the annual increases in the nominal levels of fees, rates, fines, etc approved in the respective fee-fixing and rate imposition resolutions of the MMDAs. Revenue generation strategies must be rigorously pursued to address this decreasing performance trend in IGR generation.The MMDAs have the capability to mobilise IGFs from existing revenue sources only with a guided strategy. The quality of MMDAs’ Revenue Improvement Action Plan (RIAP) should be improved upon in order to avoid introduction of a budget slack into each set target.

The first half year of 2014 shows that out of a total annual revenue budget prepared by all MMDAs in the sum of GH¢195.47 million, GH¢72.86 Million was actually realised resulting in a national average performance of 37%. Five regions, i.e. Volta, Eastern, Upper West, Ashanti and Greater Accra performed above the national average. It is hoped that by the end of 2014, a minimum of 74% actual collection will be realised(Aide Memoire, 2014).

Strategic guidelines are being developed under the auspices of the Fiscal Decentralisation Unit of the Ministry of Finance to guide MMDAs in revenue mobilisation and management. It is   anticipated that the guidelines will be finalised in 2014 for use by the MMDAs in 2015.

CHALLENGES FACING LOCAL GOVERNMENT IN GHANA

Factors Contributing To Poor Revenue Mobilisation In Metropolitan/Municipal/District Assemblies (MMDAs):-

1. Poor administrative capacity to assess the revenue base.
2. Poor administrative capacity to enforce the payment of taxes.
3. Explicit and intentional tax evasion and resistance from taxpayers.
4. Corruption, including embezzlement of revenues.
5. External pressure on the District Finance Department to provide optimistic projections; and  
6. Political pressure on the local tax administration to relax on revenue    collection, especially during election periods.

The above are Findings OF the National Consultative Conference on Strategic Guidelines to optimise Internally Generated Funds (IGF) in Ghana held on 6th May, 2014.

    Other Factors:-

1. Low Public awareness and education on tax/rate liabilities of rate-payers.
2. Absence of an effective Street Addressing System for ease of identification of properties, businesses and other rateable objects.
3. Low application of modern technology (ICT) in revenue mobilisation.
4. Lack of logistics, especially vehicles, protective clothing for revenue collectors are a major handicap.
5. Lack (or low level) of motivation of revenue collectors and staff of revenue supporting services.
6. Poor supervision and monitoring of revenue collectors.
7. Fraud through receipting (“shifting of carbon”).

Reasons For Low Rate Payer Compliance In Revenue (Property Rate) Mobilisation For (MMDAs)

1. Complexity of the tax (rate) system.
2. Tax rates (levels).
3. Professionalism of the tax (rate) administration (attitude of revenue collectors and MMDAs officials toward rate payers – customer relations, communication, etc.).
4. Low level of tax (rate) payer awareness.
5. Poor State of information systems.
6. Ineffectiveness of enforcement mechanisms.
7. Availability of resources to undertake effective implementation of programmes (level/quality of service delivery and infrastructure provision).
8. Negative perception of government spending by rate-payers.
9. Perceptions of equality or fairness.
10. Poor perception of the use of the revenue by the Assembly towards developing and providing social amenities in the District especially by the owners of commercial/industrial properties.

The Way Forward/Recommendations:-

Fiscal Decentralisation policy, in its current form, has managed to cede some rating powers and revenue sources to the MMDAs and allows them to exercise their discretion of the use of resources based on their plans and annual budgets. The Inter-governmental Fiscal Framework/Inter-governmental Fiscal

Transfers (IGFT) which relates to the policies governing revenue, expenditure and service delivery arrangements between Central Government and the local government units, covers both policy and legal environment consisting of:-

1. Expenditure and Revenue Assignments and Internally Generated Fund.
2. Inter-governmental Transfers.
3. Borrowing.
4. Budgeting and Financial Management.  and
5. Institutional Arrangements;

Revenue assignments consisting of IGF and IGFT are still not adequate to tackle the huge projected expenditures of MMDAs if they are to perform the  numerous functions expected of them and render good quality services and development to the inhabitants of the various MMDAs across the country.

This situation has led to a huge financial gap between the needs and the available resource  of local governments in Ghana. In order to address this financing gap, some recommendations have been    proposed-

1. An effective machinery must be set up to enable MMDAs enforce their revenue laws and regulations. The MMDAs must assist the Judicial Service to create more courts or use the existing courts more efficiently; dedicated days should be set aside exclusively for MMDAs cases.  Additionally, a legal framework should be established for sharing of fines and costs. The current situation whereby all fines go into the Consolidated Fund does not favour MMDAs and therefore discourages them from pursuing defaulters in the courts since they (MMDAs) incur cost in prosecuting such cases and these costs are not even recovered due to the current position on fines.
2. The issue of borrowing by MMDAs must be seriously re-visited. The Local Government Act, 1993 (Act 462) allows MMDAs to borrow up to GH¢2,000.00 without Central Government approval; anything beyond that amount is subject to approval by the Minister of Finance in consultation with the Minister responsible for Local Government and Rural Development. It is highly recommended that the MMDAs must be allowed to borrow long-term funds for capital projects so that they can free their IGF and other transfers for efficient delivery of services. A typical instrument being recommended in the floating of local government (Municipal) bonds. The first bonds to be issued must be Revenue Bonds which should focus on the provision of economic, income-generating infrastructure and services.
3. Further, the Street Addressing Project which the MMDAs have been mandated to undertake is going at a very slow pace due to lack of funds.  The Central Government is encouraged to turn this project into a national one due to its significance and source for funding in its 2015 Budget to undertake this valuable project within the coming year.  The gains from this project are enormous both to the Central Government and the MMDAs.
4. Following from the Street Addressing Project will be the building of various socio-economic databases which will serve as the bedrock for an efficient revenue mobilisation scheme.  Setting of revenue targets will be more realistic, identification of properties and rateable objects made easier and billing and collection of revenue very enhanced. This will also pave way for the utilisation of modern technology, especially ICT, in the efficient generation of revenue.
5. The application of modern technology will, to a large extent, address the issue of fraud in terms of minimising or eliminating completely  “shifting of carbon” embezzlements and other vices perpetrated by some revenue collectors.
6. Institutional and policy arrangements must be put in place. Amendments of obsolete laws, regulations, processes and procedures must be effected to streamline the revenue mobilisation machinery and financial management in the MMDAs as a whole.  Structures in the MMDAs must be streamlined by separating the Revenue Units from the Finance Departments and new units like Revenue Monitoring and Supervision and Marketing be created under the proposed Revenue Department which department should be headed by a line director

Conclusion:-

When the above recommendations and measures are implemented, it is anticipated that Ghana will witness a dramatic achievement in Municipal Finance in the near future. Service delivery will improve and the people will live a peaceful, comfortable and secured life.