Factors affecting the economic and administrative aspects of local government finance in Africa

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.JCONOMIC CC,i\lMISSION FOR AFRICA Seminar a• Local Government Finance Addis Ababa, 5-17 September 1966

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E/CN,14/UAP/53 29 August 1966

Original: ENGLISH Ouly

FACTORS AFF)i:CTING THE ECONOMIC AND ADMINISTRATIVl ASP;<;CTS OF LOCAL GOV :RNNZNT FIN,JICE IN AFRICA

(Introductory Paper by the Secretariat)

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E/CN.14/UAP/53

FACTORS AFFEC'l'ING LOCAL

TH;:: ECONOMIC AflD ADMINISTR.i.TIV"ii: ASPECTS OF GOVR.'il!MENT FINANC ^cc; IN AFRICA!/

· IlrTRODUCTION

1. The original title Government Finance (some

given to this Seminar was "Seminar on Local Aspects)", As has been made plain in docUJnents relating to the Seminar, the very Bize of the subJect means that only certain major i terns ca~, be dealt with in the time available. For the sake of brevity the last two words have been deleted from the title.

Even though this lack of time restricts the range of examinatio~ and deliberation, -there will still be a comparatively large nUJnber of expert papers on specialized items contributed by certain countries and

consul tan ts for use as resource ma teria.l, as well as the country informa- tional papers which give back~round d8tailsa

2. I:i view of the limited rar-"'e of i tams being considered that the ECA Secretariat paper should

dealt with, it was be deliberately framed so as to deal in generalizations, cover matters with which the speoiallzed papers cannot deal, a1,,d be ·used in an introductory fashior.. Its object, thereforo, is to discourse on the administr1<tive and economic aspects of local goverma9nt finance 1n a generalized way, highlighting not only the importance of I'lnancial resources towards tbe effectiveness of any local government oystemt but also a nt:_:nbar of ether factors, human and material, which in the finar,Gial sphere, have au influence for strength or weakness.

GENE!lJ\L

3, Participation in this Seminar has been deliberately restricted to countries which h?,vo local government systems with a similar baokgrOULd, The reason for this restriction is, that whilst examination of local government finance in the independent countries of Africa is felt to be

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In this cont9xt, ^{11 ..} frica" meanE only those independent countries

which have a local govornm9nt system influenced by the British tradition,

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timely, it is -first necessary to confine such an examination to those countries whoae concepts of the functions and financing of local government have featuxes in common.

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Macy countries in Africa are questioning the syst01D of local government which they inherited, In some cases this is because of impatience- the system has not quickly produced the required social and economic development at the local level; in others because the system as they found it does not completely fit into the new political theories upon which the emergent State is to be based; in others because the system has broken down under the strains and demands placed upon it.

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Or it may be a ·combination of all these factors whioh causes the goverment to examine the syst~m and query whether it requires modification or

completely re-builditg,

5.

The paramoi.:nt needs of all African governments are twofold: firstly, to maintain political unity and secondly₁ to speed the pace of economic development. With the first this paper has nothing to do, but in

discussing the effectiveness of any local government system, one cannot ignore the 'fact ·that if the syatem is unhealthy, either administratively or'fina.noially, then it has an adverse effect upon the unity of the country.

6. Finaoce as a ~aiustay of local government,

It has been said that finance is the life-blood of local government, but aelf-evident as this raay be₁ it is often the last factor to be examined when the system itself is brought under examination. In how maey countries where new local govGrnment W'lits are being created or wider tasks being handed down to local authorities, is an examination of the fin~cial aspects made prior either to legislating local bodies into being or devolving 'additional functions upon existing units? The need to stress the importance of this principle has been underlined in a report submitted to the Government of India by a Study Team set up to examino local

government finance, wherein the team stated "We cannot help wishing that when Acts were passed by Legislatures, an attempt had been made to estimate . the miJ.limum cost of fulfilling the obligatory functions (of local government

units) aud to provide resources for the purpose" The actual resources

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often vary inversely to t'ie ,c'Ilber and e:,r+n.,-1; c,f obligatory functions."):/

The failure to take this important principle into account is not

necessarily due to any deliberate intention to starve local authorities of the finance needed to carry out their tasks, but often because of clumsy administrative procedures, or to lack of co-ordination at the time when legislation is formulated and drafted.

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llhatever may be the reason, however, it must never be forgotten that a proper financial basis is necessary for building the edifice of local government. This asswnes even greater importance if local government is being consciou.sly used as an instrument for development. !That central governme~t- can itself administer every function from the Capital, or does not realize·the necessity for directly involving the people at local

·. levels in the process of nation building and progressing towards social and economic advancement? In the majority of countries the local

administrative form is there, but it is vital to ensure that it has sufficient .administrative and financial strength to enable it to keep iri step with the pace of central development and is also understood and wanted by the local population so that they give it whole-hearted support.

B.

Problems of winning local support.

One of the weakness of local government authorities is that so many of the services which they have to carry out are unremunerative or no~- productive. It is for this reason that the local tax payer is often reluctant to pay what is due to his local council. This is especially true in the rural areas, where often the bulk of resources of local

authorities is devoted to such items as education,· health, roads, community development and administration, and comparatively little towards the

development of agriculture, forestry, veterinary services or looal industries, It is, however, by these latter resources that the bulk of the po.pulation live, and if they feel that their local authority is not directly helping them in their attempts to improve their way of life,

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Report of the Stud;; Team on Pachayati Raj Finances,

1963,

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they will be reluctant tc support the council, least of all pay its dues. Very ofteni-':.iu this lceck of identification of local councils with development which exacerbates the inherent difficulties which they face in the collection of taxes, This is not to say that the services upon which the majority of revenue is spent are not conducive to economic development; they are, but often not visibly so, and experience points to the necessity for the activities of local councils, and especially ones in rural areas₁ to be more actively associated with the economic development of their areas,

9.

This factor is one which is not often realized by central governments and is one of the reasons whY they are chary of fully utilizing local authorities in the development of their countries, If one examines the trends towards administration of the many new and complex functions being undertaken, it c~n be seen that instead of involving local authorities with the economic development of their areas, the practice is, more often than not, for there to be created a proliferation of boards, committees and organizations, each with their own staffs, instead of concentrating all things appertaining to development and government in one body where

local opinion and experience can supplement specialist knowledge. Apart from the economies thus achieved, full use could then be made of the relatively few highly trained officials now available,

10. Functional responsibility and financial responsibility,

Local responsibility implies, of course, that a local authority must have some financial responsibility. Sources of local revenue are those which a central government allocates to local authorities and usually they are those left over after the central government has pre- empted all the worthwhile resources. It is extremely rare to find that paritq,- exists between delegated functions and allocated finances. But at the same time, it is also true to say that most local authorities in developing countries are rarely in a position to claim wider tax powers, Usually the local councils' records of collection of local taxes are

unsatisfactory, and in many cases the levels of assessments of taxes· which

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they themselves fix are low to begin with.

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Indeed, undertaxation, parti- cularly in urban areas, has been a source of trouble in a number of

countries. It has encouraged a drift to the towns because it has been possible to escape thereby the payment of taxes levied in the rural areas, and has caused urban authorities additional burdens due to unproductive populations, Coupled with the reluctance to properly compute the possible amount of tax which could be oollected and the resistance of the local population towards payment of taxes, there is usually also inefficiency in the administrative collection machinery.

11. .This inefficiency is not only due to a deficiency of proper records., the inability to assess proper levels of ta.Jtes and the lack of trained staff, but often also to the impedance created by locally elected

representatives thBJDselves, who bring pressure to bear upon their officials and hinder efforts to bring tax defaulters to account, It would seem

then, that in addition to achieving full utili,;ation of exist in;.,; resources, ways and means must be found of administering the collection of revenue so that the "tax machine" can operate without interference and at full effic~ency, In other words, once a local council has fixed its level of taxation and determined what it requires by way of revenue, the actual collection should be carried out by methods free from obstructive tactics and extraneous pressures. It has been suggested that it would be best to incorporate both central and local· tax collection in one agency, so co",l'tituted as to ensure that e~ual emphasis is placed upon the collection of both types of taxes. All the officials of this central office need net necessarily be civil servan,s; they could be local government staff operating within the of'fice under the direction of the Chief Taication Officer, who should be a senior civil servant. This method could well be instituted, but only as an interim measure. A system of local

assessment and collection should be the ultimate aiJ!l. Only by constant efforts on the part of politicians to produce the correct frame of mind amongst the public can a correct taxation atmosphere be created; but if the local government system is trusted and the collection procedures efficient, theBe factors too can contribute towards a healthy local administration.

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l;!,. Other suggestions can be made to improve tho tax collection situation,

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One mothod which is·being utilized in some countries is to limit the payment of central government grants to proportions equal to the a.mounts of local taxes collected. Another proposal which is being considered is to reQUire the production of a current tax receipt before any local licence is issued, or.a child is permitted to enter a school, or even when medic~l attention at a local dispensary is required, But in the end₁ the only proper method is the inculcation into the citizen of a tax consciousness, so that bis taxes are paid on time₁ tax evassion is kept to a minililum, and above all he holds a belief that the taxes paid provide the services he wants, and

fo □ ters the economic development of his area.

13. The human and economic aspects of local taxation,

It is very important that local authorities. not only have a steady source of income, but also one which is capable of expansion, It is not 'the object here to delineate the various sources of income available

to local authorities, nor to differentiate between urban and rural

taxation resources, but it is worthwhile to mention that if possible, in the circumstances of local government in Africa to-day₁ the basis of the taxes levied should be understandable, both by the taxpayer, the local councillor and the official; be relatively simple to assess and compile;

and be easy to adninister and collect. For instance, if a tax is simple to assess, but problems arise bocau □ e of the difficulty of serving dema.,d notes upon taxpayers, then delay may occur in the collection of this tax and large numbers of defaulters may result,

14, Local taxation should not be-regressive in incidence, but should create both the desire for expansion and an atmosphere in which the taxpayer, if not happy to pay ta.ic, at least should have the impression that .he gets value for his money, Too often on both counts the reverse is true; the tax structure is such that it discourages endeavour, and inefficient or wasteful utilization of money resources causes bitter

criticism to be made of the local authorities, Efficiency in administration is not only achieved by the creation and training of a professional class of local government officials, but also by the training of councillors

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and members of the general public.

15. These two latter important aspects, which can have tremendous influence upon the financial situ~tions of local authorities, are often neglected. It is rare to see positive training in their respon- sibilities being given to councillors. J!Jven rarer to find a fully

informed public which knows 1,ha t its local authority is doing or planning to do₁ or to find a local council which has created a fully developed public information service. This latter does not need to be a

sophisticated expensive news service, but a conscious effort on the part of counoillors and staff alike to keep the publi? info1'1Ded, even if only by word of mouth, of why their taxes are being levied and how they a.re being spent. If the public are so informed, there is not only less chance of inefficiency or waste beini; prevalent in tr.e operation of the local authority, but a greater chance of there being engendered a positive rather than negative attitude to the payment of local taxes.

16. An e~uitable taxation structure is also an important factor. Not only should the taxation method be based upon an individual¹s ability to pay, but it should also take into account the benefits he receives from the activities of his local council, In Roman law there is a principle which states: "He who feels tho advantage ought also to feel the expense." This is a 1,rinciple which both central and local

go,rernments should always bear in mind, i.~., ¹¹he who demands services

mus:t pay for thcrn.n Responsibility f'or the imposition of taxes muGt ba-

aocepted by local authorities; their vitality and initiative should be

~aintained by making them as viable as is possLble. They should be made to budget for expenditure first and revenue second, so that they develop representative responsibility and be required to make up their own minds on whether to raiBe taxation or cut down expenditure.

17.

However, historically '.he ~ackgrou.nd of local government taxation systems in Africa, especi":lly: in ,rural areas, has been a reliance. upon r.elatively crude fQrms of .l~cal _taxation, often a flat rato poll ta.x and· possibly also a cess upo·.1 crops. The burden of taxation has oftei:

fallen upon the poorer sections of the population, which have, propor-

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tionally, had to pay more for services than their richer brethren, There is in most countries recognition of the need to rectify this situation and to irrcrease revenue collections, both in the rural and urban areas, In the latter, it has usually been the case that the authorities have found they have been too re,3tricted in their revenue potential, as their main source from property (site rate) values has not increased with the demands for more extensive services,

18, It could be saiQ that the efforts of central governments should be bent towards devising sources of revenue for local authorities which (in theory at r.r,:y rate) would (a) make the local authorities financially independent, and (b) relieve central governments of any responsibility to provide grants, Such a move would, again in theory, give the local authorities a much more direct interest in the successful levying ar.d collection of taxes than many have at present,

19, This was, indeed, the pattern, (described here in crude outline only), recommended for Kenya local government by the Kenya Fiscal Commission;Y The Commission recommended as the main source of revenue for local authorities · the device of a Gradua t'ed Personal Tax and this was, in fact, adopted, This· graduated personal tax accruing wholly to local authorities is neither a tribal poll tax nor a property rate; it is a personal tax, based on incomes of persons, payable t·o the municipal or country council in whoae area the taxpayer resides,Y It does not, of course, form the only source of revenue for local authorities, as property rating continues, but i does mean that

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pc,.•sons residing in a local authority's area contribute towards the activities of the authority,

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Report of the Fiscal Commission, Ker.ya, 1963, Chapter 5,

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Graduated Personal Tax in Ke:iya by J, 0, England; an article published in the Journal of Local Administration Overseas, October 1964.

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The imposition of the Graduated Personal Tax in Kenya brought·

in its wake many complications. These included the necessity to

introduce into urban areas a PAYE scheme, Overcoming these complications, however, caused the central government autl:orities to devise means of assessment, compile accurate tax records, formulate collection methods and sanctions against evasion, which have probably gone a long way towards solving these basic difficulties which in many countries plague central and 1o·cal authorities. Without going into the other complications of the Kenya system of local government, it is thought that many lessons can be learned from the experiments carried out in this country during the past few years, This experience has caused a Commission of Inquiry to be set up to go into the whole basis of the lo0al government system including, inter alia, the financial resources of local government. Both criticism and praise have been levelled at the GPT system, and it will be interesting and informative to hear what the Kenya delegates have to say on this

subject.

21. Problems of central grant systems.

It is doubtful whether any local taxation system can wholly di_vorce local authorities from a certain reliance upon Government grants. There is a growing tendency the world over for the central gra11.t, whether of the block, specific or equalization type, to become more and more important as a source of revenue to local authorities; coupled with this is the

concomitant degree of central control. Whatever types of 6rants are allocated, whether specific, block, equalization or all three, the major princip_les which should be followed in formulating them are: (a) that the grants should not widen the gap-between the richer and poorer areas of a country, but should bring the poorer authorities up to the same level of financial strength as their more affluent neighbours; (b) they shou.l,d not stultify local initiative and activity, (as block grants are inclined to do); (c) they should reflect a coherent and consistent policy and not be merely a series of unrelated measures; and (d) they should r_equire the recipient authorities to maintain high levels of performance, i.e.,

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be granted only on speoifio oonditionsY Relianoe upon ever increasing grants is not consistent with increasing autonomy, but if possible, a . balance between financial suffic.iency based upon local revenue resources

and underpinni:r:g from central government sources should be aimed ;,.t.

22. Central and Local Financial Relationships.

Relationships between Central Governments and Loc,al Authorities a.re extremely important in Africa to-day, The reasons are not only beoause of the danger of political disintegration, where the granting of local porers may bring into play clashes with the centre, but beoause of the tender,cy for local administrations to be weak and cause a drop in the level of national standards, and also because it is often the case _that where functions are transferred to local. authorities they are often inadequately financed and fail to meet the demands of the people· ..

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for more and better services,

23. Where governments are committed to national social and economic development, there is no alternative but ultimately to decentralize,

Decentralization should not, however, ·endanger unity or progress. Central governments can, if they proceed carefully and take legislative and

administ'rative precautions, achieve a degree of local participation in development wit~ut the bad effects described above. 'The~e precautions

· can take vario"u.s forms. In a large number of African countries a great degree of disciplined flexibility has been achieved by the use of

legislation· under which can be conferred varying degrees of local authority status, The llse of the device of separate instruments under •<h'ich local authorities are created means that the central government car,. grant just as much autonomy as it considers advisable; where a local authority shows initiative and responsibility then it can be rewarded by an

upgrading in status, There are a number of other ways whereby a oertain degree of autonomy can be exercised r.:,y local authorities, yet for the gor.ernment still to maintain the necessary cent~al control and super- vision, e • .g,, the making of local by~laws which need central approval,

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the·'eeeondment of qualified officers to authorities which cannot recruit _,thei_r .own staff, thus enabling them to expand their services, eto,

Constructive oo-operation between central and local government is vital if advancement on the local level is to be achieved,

24, If enterprise and initiative are to be not only retained, but to expand, then a certain amount of tax autonomy must be granted, Central governmeats are prone to fear that unless rigid control is exercised

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over the levels of local taxation these ma.y have an adverse effect upo•

the S8llera.l. eoonomio situation, or affect the interests of central revenue,

~liis ~ay well be so, but care must be taken to leave with local. authorities some n~ibility in the field of taxation, and also to e~sure that 4

-1\he matter of taxation policies -there exists a partnership betweea.~em and the ceu,.tral authoriti,es, with the latter on the giving, _as well as takini. side, Harm01lisa.:tiori l:letuQe,a o~ral and local fiscal policies is essqtial if local authorities are to play a. vital pa.rt. i11. sooial aed ., e~o.nomio. deve.lopme!\t, Coupled with this should be a policy of fairl,y

f'reque~t review of local tax resources - certainly not less frequent tbap.

every five years,

2,5. Aids to efficiency a,.d effective control,

Ceat'ral goverameat, apart from exercising direct cont.-ol

a.ad:

supervision, cal\ also indirectly help:local authorities in various ways to maintain not only a·fair level of revenue, but also proper finaacial a.dlninistiation, which is also importa•t in ensuring economic a11d·effeotive expendituies, · This caa be done1-

(a) by establishing commol\ codes of administrative q.d fiaa...oial practices;

( b) by inspecting the work of local authorities to eP1sur.e it is up to the prescribed national standards;

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by drafting common budgetary procedures and rules;

(d) by requiring each local authority to balance its budget, (except perhaps i• ca.sea of einergency), whea the reserves

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statutorily .required to be maintained may be cu-awn upon;

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.· ( e) by helping local authorities to acquire qualified acoounting and other· staff;

(r) by setting up uniform accounting procedures and insiatin,g upon the production of adequate final accounts shortly after

·the olose of each financial ye!U'j

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by instituting· a close· axBWination of revenue and axpedi-

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ture through a regular and accurate audit system; and

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by giving continuing help ~nd a.dvioe, particularly i~ finanoia.1 m\tters,

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The problem of penalties being ^impos,ed ,won erring individuals,

whether .the,y :'h<> councillors or staff mambarsr or upon a Ootfp.cil as a whO'le. for .either neglecting its dutt .... , .. failing td observe f!na.•oial r.sula.tions -or ... collect its taxes, is still a. difficult one for

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central eovernment. In regard to the individual,. 1'here embezzlement can

•" b,nproved, the appropriate remedy is oourt action, but in the &.se of individual or collective misdemeanour by ex,penditure ultra. vires the remedy is usually, ( in

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law ^{".~, '} _;._';;_;:,· a;t lei.st), pers~al Blll'Oll;al'ge~ Thare ar.e aumerous oases where governments, or the concerned Minister, have failed

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to 'f>~ly this penalty, mainly because there is claimed a la.ok. o.f

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oomprehension on the part of individual coW1cillors or the whole counoil ill ~egard to their respons1bili tjl.es, A cii.se is reported where surcharge

·was not" im:p'osed becau~i cif the p~ofessed inability of the individuals

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oonc~~ned to pay the surcharge which should have been levied,

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Usua.\ly the remedy for misuse of funds by a. Council is for the

Minister or Central Government to suspend the CoWlcil₇ introduce a

.Comm.issioner or oa.retaker oomm•ittee to carry on" the administration until a newly elected body can· be appoin-ted. In these cases it is essential to ensure that the interim body is efre~tive and clearly far better than the one suspended, In any event suspension is a. measure which should

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procedures, and above

resort, Effective supervision, proper accounting

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a.11' an experienced electorate and reservoir of

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persona willing and able to be councillors are the only real remedy for ensuring honest and efficient local goverl'.llllent.

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Conolueion,

These general observations have, as intended, covered a much wider fiald than the limited number of items which can be dealt with in the Seminar, They will₁ it is hoped, provide background illustrating the

factors and motivations which enhance or hinder the growth of local goverl'.llll&nt, Whatever ma;y be the system of local administration adopted by any particular country, it is clear that as time goes on more and more functions will have to be developed downwards, if the paoe of advanaement is to be maintained, Thie then is the basic reason why not only must the system utiliaed be an integral and vital part of the nation, but it must be supplied with all the tools necessary to do the job, Finance is an essential tool - therefore supply it - in the quantities and at the times neededl