Can local governments generate enough revenue to deliver services?

Lack of finance greatly constrains municipalities’ ability to deliver services to poor people. Public finance literature has paid little attention to the potential for redistribution at local government level. There are now, however, many examples of budgeting that favour poor people and other innovative practices that improve municipal finances, increase and deliver more resources to meet needs.

A sourcebook from Birmingham University and GHK International presents the findings from a study of building municipal capacity for finance in Brazil, India, Kenya and Uganda. The influence that poor people can have through local democratic and participatory processes is only as great as the influence that these processes have on what money is spent on. City case studies show that elected councillors usually have limited input into budget decisions and that the formal budget-making process does not necessarily determine what and where money is actually spent.

In many countries, municipal capacity has been undermined through central government control and removal of functions to special purpose (usually non-transparent) agencies. Much public expenditure on housing, education, health and water is therefore not locally accountable. Low pay rates hinder recruitment and retention of skilled staff, and councils are burdened with legislative requirements to present balanced budgets, which encourage unrealistic revenue forecasting.

Late and non-payment of grants from central government can leave councils with severe financial problems as do burdensome loans to finance large infrastructure projects that are of questionable benefit to the poor. Landlords are frequently able to avoid paying property tax, the major revenue source for many municipalities.

Some municipalities have adapted by developing integrated approaches to resource shortages, weak budgeting and expenditure management. Although their ability to distribute resources fairly remains limited, they are finding ways around political, economic and legal constraints:

• In Brazil participatory budgeting has introduced transparency and extended involvement to many more members of society – although constraints on contributions from the most marginalised people are still immense.
• In the Philippines the system of sub-city-level governance, once very hierarchical structure, has become part of the local democratic system: they have some funds for development projects and meetings are open to all residents.
• Simplifying procedures and a progressive tariff structure based on ability to pay has allowed Kenyan municipalities to increase revenues from business licences.
• In Uganda – where market fees are the main source of revenue for many local governments – reforms allowing municipalities to contract out the collection of charges have increased councils’ revenue.
• In the Indian city of Hyderabad – where property tax records were decades out of date – an initiative allowing residents to assess the value of their property themselves, with oversight from residents’ associations, raised revenue by 50 percent within six months.

The sourcebook provides a framework for analysing municipal finance capacity, diagnosing problems and developing strategies for reform. These include collecting local taxes, levying charges for services, improving budgeting, controlling costs, accounting reforms and mobilising finance for investment. The case studies identified how reforms were initiated and how they are sustained. Some of the key lessons include:

• Successful innovations should be introduced incrementally, demonstrating that innovations can work, but within an overall strategic framework with clear goals to spread financial capacity throughout the municipality.
• A committed leadership with sufficient political will is crucial, as is the ability to build coalitions which will survive when individuals move on.
• Policy decisions from top government levels are not a sufficient basis for reform without a supportive policy context and necessary fiscal support from the centre.
• Budgetary and expenditure management processes should become more transparent and left less to the discretion of a limited number of powerful people and city executives.

Source(s):
‘Building municipal capacity in finance’ by Khululekile Mase and Nick Devas, IDD Research News, International Development Department, Birmingham University, March 2004 Full document.
‘Municipal finance: a sourcebook for capacity building’ by Ian Blore, Nick Devas and Richard Slater, Earthscan, August 2004
‘Can city governments in the South deliver for the poor: a municipal finance perspective’ by Nick Devas, International Development Planning Review, 25, 1, pp1-29, 2003.

Funded by: DFID Knowledge and Research in Engineering (EngKaR)

id21 Research Highlight: 6 June 2005

Further Information:
Nick Devas
International Development Department
School of Public Policy
Edgbaston
Birmingham B15 2TT
UK

Tel:     +44 (0) 121 4145036
Fax:    +44 (0) 121 414 7995
Contact the contributor: c.n.devas@bham.ac.uk

International Development Department, University of Birmingham, UK

Richard Slater
GHK International
526 Fulham Road London
SW6 5NR
UK

Tel:    +44 (0) 20 7471 8000
Fax:    +44 (0) 20 7736 0784
Contact the contributor: slaterr@ghkint.com; rpslateruk@yahoo.co.uk

GHK International, UK

Other related links:
The challenges of financing sanitation

Pro-poor growth in the city: are City Development Strategies the answer?

Helping municipalities work with the private sector: a salutary experience from South Africa >

Development Gateway's Municipal Finance site

Global Development Alliance for Municipal Finance in the Water and Sanitation Sector

Urban governance: Finance (UN-HABITAT)