The contribution of local government finance to development

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U~T'ED NATIONS

1;£.0NOMI C

^{LIMITED Dis tr.}

AND SOCIAL

E/CN .14/uAP / 46 1 August 1966

ORIGINAL: ENGLISH ONLY

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ECONOMIC COMMISSION FOR AFRICA Seminar on Local Government Finance Addia Ababa, 5-17 September, 196e

THE CONTRIBUTION OF LOCAL GOVERNMENT FINANCE TO DEVELOP~

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This paper has been contributed by Dr. A.H_. Marshall, Senior Research Fellow, Department of Local Government, University of Birmingham, United Kingdom, The paper

does not necessarily express the views of the United Nations, M66-1105

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';'Jill cmnRIBU'l'ION OF LOCAL GOVJrum::J:IT TO D;WJ::LOP:{r;;tJT ( 1)

It has been SP.id thc1 t mc:re :iooks hav0 been wri ttcn on tfapoleon than on any other subject, but :iuturo gcnoraticns may well find that his place has been taken by planning and dovcl.opnwnt. Books, pamp;ilets and articles on the subject pour forth a~d t!lc:ru ci),n ha:.•dly be, n. l i tf.rate l)Jrson today who ·has not r~ad of t2"'.1c rising ~.~r->r:¹.d p:.1pt~la t,i:::n, tl1e gr,:nling disparity

bt. t ^~fEH3n living s te,ndn:i."'ds- in t.:i,-:", :1.dn-1L1v0d ou·Jn-:;:;;2. en and in those which are

in earlier stag11s of d::-:-vcloprn,c:,1t, ::.rid. of the co11sequ0rnt obsta.clG.s to

prog;resc and harmony p:::csen tod Oy t}1.'.tG ,:,i;:.p ^ft ,Joc1ld an:r educa t0d person imagine th~ t the si tu:1 tion cs.n bo met othnr~d ^:1)13 -::,_,:_;,11 by gcvsrnm€n tal

action at international, natione.l, rers;ioo:2al a'1d lo:oal lt0vc.ls.

A gro,,ing number of thir.king reoplo arc, r;o;r fa-,: cuna tely bPginning to realise that i f frustr·ation is to ¹)s c.vnidsC:, "(·,, id,oalistic, long-term notions of plann~::~s hff-.ro to b2 tr:1r1sI:::i.tci intc :(, ~acticali ties e,nd, hardest of all, put inte op0r2,tion. It is at this -po::.n-~ that the role of local government eme:rge-s~. fc._· of al) .., ,.v0ls cf' govcrr,m<:at₅ loc,'.'1.l a.uthori ties should havA the:i.r f0t~t most fiirt,_;i n:1 th1; grc,u:.1f.~ Tl::ey n:::e o:i the spot, and oan sensB thG pco:pl0¹ s neGtls a~d cr:tpao:i.-Lios.. B.Jinr.; grmeral purpose authorities, they c·wa tab, a,1 c·;·0::i:1ll v~,m of tl:s loc:il situation. They unde_rstant?, _thr lpcal p:;:--,cfc.:-e:r:cc;n · ai1d ct1.n gc,ug0 t:1s st?:'<..;n2;-th Of religious and sectional dif:Z'r:rcnc~s., As th,:,: oalJ :-i.oocl body ::8;_11•es~nting ihB Whole of tho _comrm~n~ t:y and c9\i (n•in~ i;hc• ·,,fr1olo o:( the:i.r a::-ca, t~i.oy can mobilise and co-ordinatf: thv t1ffortn of ir:0i'\~d.uaJ s al'l~ Lt.soocia~:':.ors~ They can creatP- net.f loy.:1.lties t'.) :r.;;,placo oJ:,:LOr; 0.1:J~-:Tfl:JP.ring ticcs As the one

"perman~nt local 0usoci,c.t:!on they 00,:_1 t·!nunre ·:!ont:..:1ui

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They can edUcate both the central gcvtiJ::~1ml'nt ir: tho 1,:-:,aa.l rcc,._;1i:.·s:-:·-::i.lts and. tho local

inhabitants in th ✓ ir dn"".:;ic:[~ ::i.:::_,:t .-:..~ocyo~n::.i1:· · ti.c:;:;., I~: tl.;.0:-t, -they provide the· central government ¹1i th rt·:ciedy 1..t2d::'! :,1ult.i•~pt·,;,_,·;--H)2e aecnts~ possessing an authority and prestige second on::.y to thnt v:f .. ,.,he ccnt.;.'f1.l gc~rer'!lfil€nt itself.

All this ;:;ounds very fine, 'ou·~ tc b0 of voJ.1i,, o. t ncedn to be l'forked out in practical t0r·rns. Accordingly tho T'Gst o:: this pa90r ;fill bP devoted to indicating, with sriecial. i•sforenGo to fi;'1G;',CO,

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gc,:-ier11l shape of

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ansuers to seven quest.ions, leaving the represdntatives at the seminar to give more precise answers for their respective countries. fue questions

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1) What is the u<.)ntral government's part in tho local authorities' development uork:

2) What services should a local authority provide:'

3) Ho,, can·a local authority prepars tho people for development·, 4) In what ways can a local authority assist the central gover~m@nt

officers in dev,;lopmcnt work?

5) What is the local authority's function in budgeting, planning and the investment programme?

6) ·,lhat is tho role of financial policy?

7) To what extent can financial administration assist?

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What is the: central government's part in the local authorities' devtl£.e:- ment work?

Thr central govornmclnt is paramount; it must accept the final

responsibility for the community's social well-being, political health and econo;;iic and financial arrangements. It has to make the overall plans, co-ordin;ite activities (e.g. not move "orkers without i,oeing that living accommodation ia provided), handle foroign aid and the raising of capital.

It must provide a good part of the infrastructure; local authorities cannot be expocted to supply hydro achPmes, large dams, main roads or advanced technical education. Finally it must be responsible for the local government structure.

So in dealing ,,ith local gov<'rnmcmt, the central government must remembe,r that it is strong while the local authori tiPs arc weak, Its

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expert staff ( ths central governmrnt ,rill always have th•o cream of the personnel) must help thee local authorities eho can seldom employ all the technical skill for engine ,,,ring, agricultural and vetGrinary work.

The, central gov&rnment should not overload its relatively weak

partners with too many n,w duties at once, but should be flexible, adding new rsrnponsibili ties as the: local authorities show themselves capable, of carrying them, for th ore is no reason •:hy local authorities should all havo exactly the same work. The existence of ;,rna.k authorities should bn recognised, and s:trong"r authoriti, s should not be ponalisod because of their feebler brethren.

In financial matters the centre can do a good deal to prevent local authorities being thwartud by rigid arrangements. A looal authority which has shown itself to be; reliable should be allom,d the utmost freedom in budgeting. Local authorities should be found adequate local taxes. Grant systems, should alloic for growth in Bxpendi ture. In other words new duties should not be placed upon local authorities without financial resources to carry tr.em out. There should be the utmost promptness in dealing 'vi th budgets, and applications from local authorities. The comment "we are waiting for a dc,cision from the central government'' is heard all too often.

A local authority, being an all purpose body, is entitled, especially in d&vclopmcnt matt1,rs, to deal with the central govornment as one unit, and not 'a series of separate departments, a point c&ntral governments should tars, to heart.

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':Iha t services should a local authority provide?

Lo<:al services will naturally vary from place to place, but the following indicates the kind of >:or'' th•sy can do; engineering (roads,

»a tor 'conservation, water drainage, ol,,ctrici ty supply, ferries), heal th (insp,;ction, environment, curative services - e.g. clinics or

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dispensaries - and health education), social and recreation (clubs, sports facilities etc.), housing, planning, education, libraries, agriculture, vet<>rinary, timbr;r, markets, and trading undertakings.

Most of theoe servic0s have some lcind of d0velopmont significance, The health service for instance is designed not only to control disease .but to produce healthier, and hence mor0 active, citizens. Some services

can be fashioned with particular roferenco to development. Thus an agricultural service n<'c·d not restrict itself to control of disease or

even to teaching bett,or methods. lt can operate nurseries, hire plant, stock ponds, su;:,ply seeds, bro0d cattle and so forth. As to water

conservation and drainage, it is hardly nec"ssary to point out holl direct the contribution can be,

When we come to consider trading undertakings i,o c-nter more debatable ground. honopolies in the form of public services suoh as the provision of ::atcr, transport or light are obviously suitable for public operation, as aro also emergency precautions like the storage of crops against famine.

But should a local authority "trade'' in the ordinary sonse of the term?

Th<! ans:rnr is probably the:·( such activity is best left to private

. indiviquals because of the nature of the task and of tho kind of decisions needed, neither of which features lend thcmselv"s readily to local

authority proc<"durc. 'I:h<' theoretical exception is tlrn case where no one comos fon,ard to provide a necessity, or Qlce tho provision is un-

satisfactory. A public authority might have to step in, e.g. to secure a milJ.: supply. But j_n fact local authoriti<'S tho world over do v1ory little of this kind of &ntorpriso, even CThcre under the la:./ they have general po,,ers to provide any s<'rvic0s the oommuni ty needs. In S;,eden for instance a local authority sells timb:r :from the locally owned forests, but-does not set up as a timber mnrchant, buying ami solling timber.

In dec_iding what services a local authority c:m undertake, size and resources are important factors. Vc,ry small authori th,s with little money and. poor staff can play only a humblG p;,rt in development \!Ork.

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Joint action between local authoritiGs, often desirable, is sometimes difficult to attain for there, is a reluctance in many parts of thw 1,orld to join forces to achinv:: uven licli t&d objectives. Yet overywhere

economic, social and political pressures make .collaboration more essential.

A change of heart is needc;d. ThC're is missionciry work he.re for central governmPnts and leaders of local society.

How can a local authority prepare tho people for development?

Local councils should try to ke,p ahead of the citizens in identifying local needs and finding ways of meeting them. A great doal of work must consist of leading the comcmnity for.,ard, Coun,J:i.ls must pay attention to public relations and kcr;p in clcse contact 11ith tho inhabitants. flhen co-op0ration is n0ed0d for a projr:·ct, the public should bo made aware in advance of the aims ~nd of the co-oper·ation expected from the people whether i t be n,,gative, e.g. accepting some r'lstraint; or positive, e.g.

providing voluntary labour. If communal effort is required for a scheme incitiated by a:10,her body, e.g. tho central government or a community dev;elopmcnt organisation, the local authority should put the ·,,eight of its prestige behind tlh: entorpris<a, and if aj)propriato assist with men or money.

Of the duty of th'e local authority to foster the desire for education and for the acquisi.tion of skill i t is impossible to speal~ too strongly.

Modern economic devolopme0nt ':lrings bewildering problems, ·even to the relatively advanced nations, and urban and rural authoTities alike have a prime duty to help to condition their inhabitants to the change.

Fast growing urban authorities havo special problems. Th~y have to make physical plans for devclopmcmt, provide housj ng and other servi0es needed by a population unused to to·,m life. Tneir boundaries and .Powers should be such that the crca tion of fringn zo,:ios of shack dwellings can be

prevented. 'll:1.<- officiency of the workers ,rill be influf'nced by the facilities and environment provided by tho local authority, especially those for employees uprootGd from the rural areas. In tr.is task the wise oouncil.vrill enlist the aid of employers who may be porsuaded to help i,ith the provision of housing, social and recrcational facilities.

Members and officers of local authoriti~s, having a close connection with the p"ople at ground level, should be able to do more to secure

acceptance of unfamiliar policies than officials of the central government who are inevitably more remote. It is part of th~ir duty to maintain harmony both bet,roen the localities and the. centre and also within the locality, a local authority which represents the inhabitants as a whole can do a great deal to h<Jal rifts within local society.

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In what ways can a local authority assist the central government officers in development work?

Central government ,,,ill expect local au.thoritics to assist in making development programmes, e.g. to provide information about-the potentialities of development schemes, about the relative merits of alternatives, the

schemes which will yield most income or, in an area of surplus labour, which use most man pownr. '.!hey should also be able to help in determining

taxable capacity or possible levels of charges.

Raving selected project0, the centre ,,,ill look to the local authority to .. secure acceptance by the public, as has been oxplaini;d in the preceding section, even. though the ,:,rojc,ct is to be carrh,d out by the government.

When tho scheme has b0on launched, tho local authority must be prepared to take its share of thn responsibility. Support can be given by the local authority i'n several ways. A financial contribution to a government

scheme inay be expected, if only to ensure local interest. Help with staff may b8 needed from the local authority's ad.ministration, its specialised employees, or unskilled labour.

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Help in conserving scarce technical skills can be a major local contribution. It is important that highly Qualified central officials, when visiting local au·cho1·1 ties, should spend as much time as possible doing the ,rnrk for ,;hich -they have sp,,cial ekill. If a veterinary officer is to carry out innocula tions, ths- local authority should be willing to make the advance arrangc.m0nts, ensure thqt the cattle ar,, gathered to- gether and provide all the necessary assistance. In "'any areas, and for many years, local authorities must be, content fo:-, ths centre to employ the most highly specialis8d staff; their part is to help to keep them employed to the maximum advantage,

}lhen receiving requests for assista,1ce from the central government or other agencios, a local authority has two special advantages to offer; it has an existing administrahvE machine, and it ·,s a general purpose

organisation which should automatically achieve co-ordination, But outside agencies are unlikely to call upon an inefficient administration, so the first essential for any local authority wishing to assist in development, or indeod any other services, is for tho administrative machine to be kopt in running order. It must be ef:Cici,mt and honest, must comply with

central government policy and methods of work, and have a reputation for correct and prompt accounting and sound administrative practices.

One might sum up by S1'ying that the local authority able to give most aid to the central government is th8 one which shows itself capable of gradually talcing on increas<Jd r0sponsibili tios. Smooth running local

authorities are a priceless national ass"t, invaluable both for the purpose under consideration in this pap0r - ·,hat of developmc,nt, and also as points of stability in times of ,rntional u,ihoaval and unsettlement, when the

centre may be torn asunder.

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What is the local authority's function in budg., .:,.,1/{,_J:!.l,m_rij.ng and · the investment programme?

All local authorities will. he:,;; an::iual rcv,mue budgets incorporating their programme of spe.nding fu:r ·!;ho yca1: w1'J.. their estimates of income.

Thc;ae-budgets, 1:hich usually ha.\.:e ^-t;\1 b.-1 tllJp::;:o\rcd ·o;y- t!le central governmf:nt, oonsti tute the local authar·i ty' ,; pJ.an of F.otlan :.or tho yc,ar. It is through the medium of them that the local at·.thority vo,, effect to such P<;irt of its development ,,ark as is reflect,:d i:1 ,rn::ront ,,:o:pc,ases or current income.

A. local authority which has shown that i : c;a:.~ bo trnstcd., should be allo\i'ed to budget under fairly broad h<•ads of acncurt n:1.l ehould be aliowed

reasonable latitude in executing the k.J.got, 3•n tho principles of

budgeting, e.g. that all proposed. expenditur0 should be covered by income, must b<o adl1cred to.

These budgets r@fcr to continuing ser·i'icos, fci· -:hey can accommodate only relatively small sums of n•:,n-recu::~·ine exp.;ndi turo; and the;Y are made for a single year. Developmvnt ani othe:· capital projects need. long-t0rm planning; the single year used for current expen~it~ro is not enough. If local authorities are to pJ.ay a part in devolopCJ<mt thoy thus become

involved in long-term budgeting, a.id i:1

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problems o:Z investm('nt and of securing capital monies.

Sul>jeot to exceptions :::or i ts;cs of rd.i,or importance, the total amount of capital works to be undertalcP·.1 jn a ,t2veloping country -.rill be finally settled by the central government. 'i'l;.e tJl.:mc of th0 local authorities will thArefore be pruned in the light of 2-vailabl.e ce.p:i. t2.1 ao uell as .local resources. Save in t!lc caso o:s:· a f:.:nr of t~~D la::'tF:Gt tn:-~s, capital monies are likely to come from the govi:.r.mcTc, sc::ce·,ir.:~~ in thG form of outright grants, and sometim0s in that of lo:i.ns, ,-::,_i,,h h::;' i:o be repaici by

instalments within tho expected life of :·;10 assJ<, togcthc.1· with interest.

The annual loan charges a;ipear as an i to:,1 i:: '112 c-c-,-,mue budg,,t. A few

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of tho largest authorities may bo able to raise capital monies from local lenders or even from an organised money market, and some authorities may be able to set aside modest riums from their current revenues for c.api tal 2urposes, a practice to bf' enc·ouraged wherever it is feasible. Just as smooth working throughout the year depends in no small part on thn accuracy of the revenue budgP-t, so in capital schemes carGful estimates are an

essential of suvcess. These estimat(•s havo to include the annual

maintenance costs and any. expectod cash income. . A local authority with a number of schemes of capital developm,.nt ahead is ,,ell advised to prepare, as well as annual budgets, a long-term budget for both capital and· revenue • . The latter must r8flect the revenue effect of the capital schemes proposed, othervise the cumulative effect of capital· schemui· cannot be gauged. Both typts of long-term budgc•t lfill have less precision than the annual revenue budget but must not be despised on this account.

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,/hat is the role of financial policy?

Of the foaturcas of financial policy which can play a positive role in deve.lopment, the system of local taxation is perhaps the most important.

Taxation has been dealt with in gonoral in· another· paprr, and so will be considered here very shortly, and chiefly from the point of view of the promotion of development.

Local authorities need adequate taxes of their own, otherwise they become more spenders of money raised by th0 central government, and lose their sense. of responsibility as \fell as a great part of their autonomy.

The taxes given to them should be sufficiently elastic in yield to finance expanding services and should enable local authorities to share in the effects of rising pro:,perity. This is aehievnd best of all by relating them to income, as in Uganda's graduated personal tax, ·one of the best taxes I know in a developing country: the alternative kind of personal tax

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is an ungraduated tax, i.e. a poll tax. Taxes on output or on consumption in one form or another arc also Yalu.able and inevitable. Hence the taxes on produce, animals, bicycles and the like common in rural areas through- out the \lOrld. Taxes on land are usual in urban areas. If-possible there should boa variety of taxes and in unsophisticated conditions taxes must be sim;;,lc a_nd inexpensive to assess and to collect.

What0ver the taxes, if tliey arc to p:i:omote developmcmt, they must move with the times. Thus, to taku t\To examples, land values for taxation purposes should not be pegged, nor should local authorities be unreasonably limited in thee amounts they can levy on output or consumption. Charges for goods or services- arc also important. They should b<> constantly reviewed, for in most African territories they constitute a sizeable proportion of the revenue. To keep them up to a proper level, and to collect them

diligently, often needs courage a,nd diplomatic handling on the part of the local authority.

Another aspect of good financial policy is the forward look, e.g.

proper provision for replacements of motor vehicles and other plant by the setting aside of monies in a rene,;al fuild or the building up of reserves for unpredictable events, o.g. rainfall failure. In areas where climatic conditions are variabl1c., and the yield of taxes therefore uncertain, those reserves can be very important. It is possible in areas where local

taxation is based upon production for the tax yield to fall to zero.

Central governments should encourage local authorities to provide for such contingonci~s themselves and not to rely upon the centre, Failure to do so may set back dovelopm0nt for a long period.

A suitably devis~d system of grants to local authorities is another vital element in a sound financial policy. Whatever the system of local taxation, gov.ernment · grants will always be needed. There is nou in the world a vast exp\/rience of diffrrent forms of grant, for great ingenuity has- been shown in devising m.ethods suitable for di.fferent circumstances.

Grants can .be used tQ·provido general funds b8cause of the deficiencies

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of the local taxation system; they can be given to assist poor areas; they can be a means of sharing the cost of services tho whol,, burden of which sh'o·uld not fall locally; and they can be used to stimulate authori tics to action.

This is a whole subject in itself, Points rel0vant to development are,

a) Plain percentage grants may inhibit activity in poor areas which cannot afford their share of the cost. They may therefore need to be ueightPd according to the relative wealth of the area.

b) ifuilst general grants, unattached to services, may be suitable for existing services, specific grants are a useful :.tay of inducing local authorities to undertake new work.

c) . Local authorities must be assured that grants for continuing projects will grow should costs increase for reasons beyond their control.

( Th.e Fri ter of . these notes has seen in Africa examples of the bad effect on local morale and initiative of stabilised grants in such conditions) •

d) Few countries are homogeneous throughout, and however carefully the grants are devised, there are usually a few local ar·eas for which the genflral arrang,3mc:nts will not cater. The general pattern of grants 'should not be elaborated in an attempt to provide for them. It is

··oott(lr to strike - individual bargains with exceptional areas.

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To what extent can financial administration assist?

Sound financial administration helps in tho first place because it earns the oonfidenoe of the central authorities - th0 initial step towards effective co-operation in development schemes.

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Good administration also carries incentives to integrity: it not only makes fraud and irregularity easier to dotc;ct, it doters the wrong doer. A strict procPdure for allocating contracts mak"s it more unli..lcely that bad practic€s will be attempted by tenderers.

Proper accounting supplies fuller and prompter information, and lessens the chance of ovc,r-spending or failure to collect monies. · Slack collection of income is of course to be avoided at all costs, because in addition to the actual loss of money there is the bad moral effect on the oommunity. The man who has paid his truces is resentful; the one who could have paid but is allowed to escape, is demoralised.

It is important to bn realistic about the accounting arrangements of local authorities, especially in small authorities. They.~ust be simple and fashioned for the staff they actually have; not the staff they would like to have. It is incidentally a prime duty of every central government to provide· local authorities with suitable bookkeeping systems, to train the staff in their use and to see that they are promptly audited.

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The points put forward in the pr.eceding p_aragraphs have been general, incomplete .and provocatively dogmatic. It is to be hoped that from the di_scussions of the- group there ,rill emerge more rounded answers, capable of forming the basis for an eventual seminar report 11hich will not lack idealism, yet will be of practical value to the administrator in the field called upon to grapple with tho bewilduring changes of our time.

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