Outsourcing revenue collection to private agents: experience from local authorities in Tanzania

Many local government authorities in Tanzania have reformed their tax collection systems in recent years in order to increase their revenue. This paper examines how systems of privatized tax collection performed with respect to revenue generation, administration and accountability, based on evidence from urban and rural councils in Tanzania. It analyses the constraints and opportunities for using private contractors.

The paper finds that :

• while initially outsourcing yielded more revenues relative to council based collections from similar sources, overtime the differences in revenue collections were marginal from sources collected by private agents and those collected by the councils
• outsourcing led to lower administration costs to local governments with staff reallocation
• less political interference in day to day revenue operations has been a major benefit of outsourcing
• initial problems with inexperienced or fraudulent private agents have been dealt with by requiring all bidders to submit bank statements and bank guarantees or immobile assets as security; agents are also required to submit revenues to councils in frequent instalments
• the process is susceptible to corruption since local councils have limited capacity to conduct analyses of the tax base
• amounts agents are expected to remit are much less than revenues actually collected by the agents. The difference could be due to deliberate faulty assessment of tax base indicating corruption
  
• profit margins secured by the agents were excessively high relative to revenue returns to the local councils

The paper concludes that outsourcing is not a “quick fix” for increasing local government revenues or reducing tax administration problems.The results showed a mixed outcome; while some councils increased their tax collections, others experienced problems of corruption. The paper suggests that where appropriately managed and monitored, outsourced revenue collection may provide a foundation for more efficient and effective local government revenue administration.