Addis Ababa University College of Business and Economics Department of Public Administration and Development Management FISCAL DECENTRALIZATION IN ADDIS ABABA CITY ADMINISTRATION, THE CASE OF BOLE SUB-CITY By: Asfaw Melkamu Advisor: Elias Berhanu (PhD) A thesis submitted to the Department of Public Administration and Development Management of Addis Ababa University in partial fulfillment of the requirements for the Degree of Masters in Public Management and Policy (MPMP) June, 2016 Addis Ababa, Ethiopia Addis Ababa University College of Business and Economics Department of Public Administration and Development Management This is to certify that the thesis prepared by Asfaw Melkamu entitled Fiscal decentralization in Addis Ababa city administration - the case of Bole sub-city, which is submitted in partial fulfillment of the requirement for the Degree of Master in Public Management and Policy (MPMP), complies with the regulation of the University and meets the accepted standards with respect to originality and quality. Approved by Board of Examiners: Elias Berhanu (PhD) Signature ___________________ Date June 23, 2016 Signature___________________ Date June 23, 2016 Signature___________________ Date June 23, 2016 Signature___________________ Date______________ Advisor Firehiwot Araya (PhD) Internal Examiner Tegegne Teka (PhD) External Examiner ___________________________ Chair of Department or Graduate Programs Coordinator Declaration I, the undersigned, declare that this thesis is my original work and has not been presented or submitted partially or in full by any other person for a degree in any other University, and that all sources of material used for the purpose of this thesis have been duly acknowledge. Declared by: Confirmed by Advisor Name: Asfaw Melkamu Name: Elias Berhanu (PhD) Signature ________________ Signature _______________ Date: ___________________ Date: __________________ ii Abstract In order to effectively carry out decentralized functions and be able to efficiently discharge expenditure responsibilities, sub-national governments need to have an adequate level of finance either raised from their own source of revenue or transferred from higher level government and decision-making discretionary power. The Addis Ababa city Administration devolved fiscal powers since the ratification of the City Charter in 2003 to its tier of governments with the objective to improve and enhance public service efficiency, effectiveness and to ensure growth and development within their respective administrative jurisdiction. However, Bole sub-city administration is still unable to achieve and ensure the intended outcomes of fiscal decentralization and instead faces various problems. Numerous reports indicate that, the main problem resides on unsatisfactory revenue collection performance relative to its taxable/economic potential on one hand and inability to address the ever increasing needs and preferences of its constituents on the other hand. Thus, the main focus of this paper is to examine and analyze the practice as well as legal bases of aspects of fiscal decentralization in Bole subcity. Both primary and secondary data sources were used to gather adequate and relevant data so as to answer the research questions. Officials and expertise from Addis Ababa City Bureau of Finance and Economic Development, Bole Sub-city and woredas, Ethiopian Revenue and Customs Autority Bole sub-city small tax payers’ branch offices were sources of primary data collected through interview and questionnaires. While secondary data was also collected from the same institutions. Qualitative type of research was employed to obtain the required data and descriptive analysis method was used to analyze particularly the data acquired from primary sources and is supplemented by statistical data obtained from secondary sources. The findings obtained from the research reveals that the annual budget allocated by the city administration indirectly determines the quantity as well as the quality of sub-city’s public service provision and is impossible to discharge expenditure responsibilities beyond the available fund. Legal mandate as well as the actual practice of the sub-city proves that, the sub-city has no devolved own source revenue generation and direct utilization discretionary power and is 100% dependent on intergovernmental transfer made by the city administration. During 2011/12 to 2013/14 fiscal years, Bole sub-city received a total budget assignment of 43.63% of the revenue generated from its jurisdiction of which only 31% was utilized. Revenue sharing assignment with the method of derivation approach over formula approach is an alternative choice recommended by the researcher. Thus, the current revenue sharing formula has to be replaced by derivative approach with a revenue assignment of 55% of the revenue generated or collected within its boundary to Bole sub-city. iii Acknowledgements My first appreciation and gratitude goes to my advisor Elias Berhanu (PhD) for his invaluable guidance, support and supervision to materialize this project into reality and helped me in carrying out this project successfully. I also wish to express my profound gratitude to the officials, expertise and other staff members of Addis Ababa city Bureau of Finance and Economic Development (BoFED), Bole sub-city and woreda office of Finance and Economic Development staffs/officers and Ethiopian Revenue and Customs Authority (ERCA) Bole sub-city small tax payers branch office and head office data center. They have rendered their invaluable time, sharing their knowledge, expertise and providing valuable insight during the interview session, participating in the administration of questionnaire and providing all the necessary resources available so as to successfully complete my project. Last but not least, I sincerely appreciate and thank the inspiration, support, understanding, patience and encouragement of all those people, in particular my family and my friends, who have been instrumental in making this project a reality and a success. iv Table of Contents Title page List of Charts and Tables Acronyms ………………………………………………………….. Viii …………………………………………………………………………… X CHAPTER ONE: INTRODUCTION …………………………………………………… 01 1.1 Background of the study …………………………………………………… 01 1.2 Statement of the problem …………………………………………… 03 1.3 Objectives of the study …………………………………………………… 05 1.4 Research questions …………………………………………………… 05 1.5 Scope of the study …………………………………………………… 06 1.6 Significance of the study …………………………………………………… 06 1.7 Limitation of the study …………………………………………………… 06 1.8 Organization of the paper …………………………………………………… 07 CHAPTER TWO: LITERATURE REVIEW 2.1 Decentralization …………………………………………….. …………………………………………………………… 08 08 2.1.1 Types of decentralization ………………………………………… . 9 2.1.1 Forms or models of decentralization ………………………… 10 …………………………………………………………… 11 2.2 Fiscal federalism 2.3 Fiscal decentralization ………………………………………………….. 2.3.1 Essence and theoretical framework of fiscal decentralization 12 …… . 12 ………………………………………….. 14 2.3.3 Fiscal autonomy and fiscal balance …………………………………. 15 2.3.4 Drivers for fiscal decentralization ………………………………….. 16 2.3.5 Fiscal decentralization pitfalls 18 2.3.2. Functional assignment ………………………………….. 2.3.6 Aspects or pillars of fiscal decentralization ………………… 18 v 2.3.6.1 Expenditure assignment 2.3.6.2 Revenue assignment …………………………. 19 ………………………………….. 20 2.3.6.3 Intergovernmental transfer …………………………. 25 2.3.6.4 Sub-national borrowing ………………………………….. 29 2.4 Fiscal decentralization in the Ethiopian context ……………….. 31 2.4.1 Fiscal federalism in Ethiopia ………………………… 31 2.4.2 Fiscal system in Addis Ababa city administration overview… 33 CHAPTER THREE: RESEARCH METHODOLOGY 3.1 Research methods 3.2 Sampling ………………………… 37 ……………………………………………… 37 ……………………………………………………… 37 3.3 Data collection instrument ……………………………………… 38 3.3.1 Primary sources ……………………………………… 38 3.3.2 Secondary sources ……………………………………… 40 ……………………………………………………… 40 3.4 Data analysis CHAPTER FOUR: DATA ANALYSIS AND DISCUSSION 4.1 Overview and legal background of Bole Sub-city ……………… 41 ………………. 41 4.2 The current state of fiscal decentralization in Bole sub-city ……… 44 ……………………………… 44 ………………………………. 44 4.2.1.2 Pre-budget preparation consideration …………......... 45 4.2.1 Expenditure responsibilities 4.2.1.1 The budget process 4.2.1.3 Budgeting autonomy and its impact on public service Provision ………………………………………… 4.2.1.4 Budget allocation to Bole sub-city 47 ………………… 55 ………………………………………… 60 4.2.2.1 Level of revenue autonomy ………………………… 60 4.2.2 Revenue assignment vi 4.2.2.2. Revenue collection ………………………………… 64 4.2.2.3 Revenue collection performance within the boundary of Bole sub-city …………………………………. 69 4.2.2.4 Bole sub-city revenue collection performance ….. 70 4.2.2.5 ERCA Bole sub-city branch office revenue collection… 71 4.2.2.6 Actual revenue collection within the boundary of Bole sub-city and relative budget assignment ………… 73 4.2.3 Intergovernmental transfer 4.2.4 Borrowing ………………………………… 75 ………………………………………………… 79 4.3 Summary and major findings ………………………………………… CHAPTER FIVE: CONCLUSIONS AND RECOMMENDATIONS 80 ………… 85 …………………………………………………………. 85 5.2 Recommendations …………………………………………………………. 87 5.1 Conclusions References …………………………………………………………………………. 89 Appendices vii List of Charts and Tables CHARTS Chart 1, Bole sub-city allocated and actual capital expenditure performance, fiscal year 2006/07/ to 2013/14 Chart 2, Comparison of Bole sub-city total revenue collection with its expenditure assignment in Birr from 2006/07 to 2013/14 fiscal year TABLES Table 1: Composition and characteristics of questionnaire respondents Table 2: Characteristics and composition of interviewees Table 2, Bole sub-city recurrent and capital budget assignment, fiscal year 2006/07 to 2013/14 Table 3: Response of participants on their freedom to determine the quantity as well as the quality of public service delivery Table 4, Bole sub-city recurrent and capital budget assignment in birr from fiscal year 2006/07 to 2013/14 Table 5, Assignment of revenue collection mandates between ERCA Bole sub-city branch office and Bole Sub-city office of Finance and economic development Table 6: Table 6: Woreda level finance and economic development officers revenue collection performance self evaluation Table 7: Response of participants on the revenue collection incentives or motivational schemes Table 8: Bole Sub-city woreda level finance offices degree of collaboration with ERCA Bole sub-city small tax payers branch office woreda level tax collection offices Table 9, Bole sub-city planned and actual revenue collection performance in birr from 2005/06 to 2014/15 Table 10, ERCA Bole sub-city branch office staff composition Table 11, ERCA Bole sub-city branch office tax and tax related revenue collections in birr during fiscal year 2011/12 - 2013/14 viii Table 12 Summary of actual revenue collection and budget assignment within the boundary of Bole sub sub-city in Birr 2011/12 - 2013/14 Table 13: Sub-city and woreda level officers’ response on the 100% budget dependence on intergovernmental transfer ix Acronyms AACA Addis Ababa City Administration AACG Addis Ababa City Government BOFED Bureau of Finance and Economic Development CS A Central Statistics Agency (Ethiopian) DLDP District Level Decentralization Program EC Ethiopian Calendar FDRE Federal Democratic Republic of Ethiopia EPRDF Ethiopian People’s Revolutionary Democratic Front ERCA Ethiopian Revenue and Customs Authority GDP Gross Domestic Product GTP Growth and Transformation Plan IBEX Integrated Budget and Expenditure system KIPF Korea Institute of Public finance MDG Millennium Development Goal MOFED Ministry of Finance and Economic Development MOU Memorandum of Understanding MTEF Medium Term Expenditure Framework NGO Non-Government Organization OECD Organization for Economic Cooperation for Development PC I Per Capital Income PFR Public Expenditure Review PPP Public-Private Partnership S CG Sub Central Government SNG Sub-national Government x SPSS Statistical Packages for Social Science UNDP United Nations Development Program UNICEF United Nations children’s fund UNIDO United Nations Industrial Development Organization UNFPA United Nations Population Fund UNWHO World Health Organization USA United States of America USAID United States Agency for International Development USSR United Soviet Socialist Republic xi CHAPTER ONE 1. INTRODUCTION 1.1 Background of the study In almost every country in the world, with some exception of small states, has some form of subnational government structures that stems from diverse interest and objectives. This might be either to maintain control or to deliver public services across the country in a coordinated manner or both. The structure of those tier of government ranging from popularly elected state, provincial, municipal or local governments with high degrees of autonomy to local agents of the central government with minimal or no discretionary power (Bahl 2000, World Bank 2008). Decentralization is a complex and multi-dimensional concept and process that needs careful understanding of a given country’s local conditions and preferences before any reform measures have to take place. In principle, decentralization is a way to improve and ease access to public services, tailoring government actions to private needs, and increasing the opportunities for statesociety interactions. The efficiency as well as the effectiveness of sub-national governments’ public service provisions is highly dependent on the availability and accessibility of human and financial resources required to discharge their responsibilities and significant power to determine those resources (World Bank 1999). In essence the measurements used to determine the extent of decentralization fall into four overlapping groups or aspects of decentralization: political, administrative, fiscal and economic or marketing decentralization. Among others dispersal of financial responsibility to sub-national governments is a core component of decentralization. If local governments and the private sector are to carry out decentralized functions and/or responsibilities effectively, they must have an adequate level of revenues – either raised locally or transferred from central/national government – as well as significant amount of power or authority that will enable them to decide on their financial resources (Falleti 2005). De Mello further described the very purpose of fiscal decentralization as “By bringing the government closer to the people, fiscal decentralization is expected to boost public sector efficiency, as well as accountability and transparency in service delivery and policy-making” (De Mello 2000, p:365). 1 According to Tazi (2001), until the beginning of the 1980s, there were just few countries that transfer public spending and taxing responsibilities from central to sub-national governments. However, a decade later a number of countries around the world experience higher pressure for fiscal decentralization and were forced to revise their constitution so as to increase the role as well as independence of sub-national governments’ fiscal autonomy. By the time the very common prominent driving forces for more fiscal decentralization were; the view that fiscal decision made at the local level better reflects the demand and preferences of local citizens than made at national level, market opportunities created by globalization across countries’ political boundary that necessitate some sub-national governments or regions aspiration to economically linked to their neighbor country’s market and the desire to become economically less dependent on national government. As regions income increase or getting richer the demand for fiscal decentralization increases and their awareness about the redistribution of income from the richer to the poor regions again induces the need to boost the power as well as the role of sub-national governments and reduce that of national governments. In addition, highly corrupted, inefficient, inadequate and unfair/inequity governments also push citizens to independently control, use and administer their financial resources (ibid). Fiscal autonomy can be divided into budget autonomy which is concerned with the local spending and financial autonomy which deals with financial resource that can be obtained through the local government’s own means. However, having significant amount of own local revenue source alone is not a key issue, unless it is accompanied by significant amount of discretionary power that will allow local governments to make choices about the level and quality of public services and use of those resources without any higher level government intervention and/or pressure. The implementation of fiscal decentralization is challenging and needs comprehensive but a step-by-step or phased reform strategy. It involves a lot more than fiscal issues like the arrangement of civil service and the issue of electoral system. Countries should have well prepared and all inclusive strategies in order to alleviate unforeseen transition problems that may arise during the life of the implementation process (Bahl 2008). 2 1.2 Statement of the problem In Ethiopia, following the dawn fall of the ‘Dergue’ regime in 1991, the newly restructured system (by the EPRDF lead government) moves towards the establishment of regional governments, with corresponding decentralized government functions and fiscal powers. The new Federal Constitution which was ratified on the 8th day of December, 1994 (i.e. enter into force since the 21st day of August 1995) reinforced the principles of decentralization and further allows sub-national governments to directly utilize their own revenue generated within their respective jurisdiction (proclamation No. 1/1995). The 2003 revised charter of Addis Ababa city government was formulated under the frame work of the federal constitution and in particular article 49 of the constitution granted the city government full measure of self-government (proclamation No. 1/1995). Since 2003, the city government devolved public service delivery functions to its subordinate tiers called sub-cities and woreda administrations. It also decentralized fiscal powers to the level of sub-city and woredas with the objective to maximize growth and development, enhance good governance, improve the efficiency as well as the effectiveness of public service delivery provisions, accountability and transparency in accordance with the principles of decentralization (proclamation No. 361/2003). Both sub-cities and woredas of the city are self-governed and administered by elected sub-city and woreda councils respectively. In doing so the city administration has shown remarkable improvement in devolving public service delivery functions to its subordinate tier of governments. However, in spite of those improvements, the city administration still faces a number of problems in delivering public services and carryout infrastructural as well as development projects. The Addis Ababa city Bureau of Finance and Economic Development (BoFED) in its 2014 ‘Plan Preparation, monitoring and assessment manual’ points out various issues that the city administration and its tier of government not succeeded to accomplish and their associate threats on the residents of the city and the city government itself. According to the manual, the common prominent problems observed in each tire of the city administration particularly at subcity and woreda levels include; low revenue collection performance relative to the city economic potential, lack of sufficient budget, inability to adequately provide social services and 3 accomplish infrastructural and developments projects in time, lack of transparency and downward accountability, and etc (BoFED March 2014). The five year (2008/09 - 2012/13) development plan execution assessment report of the same bureau also indicates that, though what has been done in the revenue collection and tax administration are somehow encouraging, the revenue collected relative to the city’s economic potential capacity is still low (BoFED, December 2013). In addition, a study conducted by BoFED (2015) found out some revenue collection and administration weakness observed in the city that includes: inability to improve collection & enforcing rules and regulations, relatively lower level of non-tax and municipal revenues, collection of land lease is poor, more focus on spending rather than revenue administration and etc in which all of the stated functions are undertaken at sub-city and wereda levels. Similarly, the annual report published in 2014 by Bole sub-city Office of Finance and Economic Development explicitly acknowledge that, almost all socio-economic problems observed at the Addis Ababa city level are also the problems of the sub-city in which it experiences in discharging its functions and/or responsibilities through its arms - sub-city and wereda level sector offices and other public institutions function under the direct supervision and control of the sub-city (Bole sub-cit June 2014). According to the city BoFED 2014 report, though the annual revenue collection made within the boundary of Bole sub-city relative to its economic potential is said to be unsatisfactory, statistical data shows that it is still the second sub–city of all the ten sub-cities in its revenue generation to the overall city annual revenue. However, despite its significant revenue contribution to the city, the sub-city still not succeeds in improving the quantity as well as the quality of its public service delivery to the required level. Moreover, inability to ensure an efficient public institutions and capitalize its human resource so as to accommodate the increasing needs and preferences of its constituents that is brought by an ever increasing number of residents and in particular the rapid economic growth and development of individuals, private business firms, and public enterprises. On the other hand, as repeatedly indicated in the stated annual and other financial reports the sub-city revenue collection performance relative to its’ taxable potential is still below the expectation and is unable to meet its previous year annual revenue collection targets. In general the sub-city’s overall public service delivery and revenue collection performances are not to the 4 expected level and unable to enhance the desired outcomes of the city’s decentralized fiscal power objectives. 1.3 Objectives of the study In light of the information given above, the general objective of this research is thus to examine, understand and analyze the actual practice and legal mandates of Bole sub-city with respect to aspects of fiscal decentralization and to see how the devolved fiscal power functions to enhance the intended outcomes of fiscal decentralization within the boundary of the sub-city. The specific objectives that the study will address are: 1.3.1 To assess the sub city’s legal mandates with regard to budgeting autonomy, revenue raising and borrowing powers. 1.3.2 To examine and analyze the sub-city’s actual revenue generation and collection practices. 1.3.3 To examine the sub-city’s actual budget formulation and execution practices. 1.3.4 To assess and understand the purpose of intergovernmental transfers/grant. 1.3.5 To give possible recommendations that will enable the sub-city to enhance public sector efficiency, increased downward accountability and transparency, ensure significant sub-city revenue generation, budget formulation and execution powers and/or autonomy. 1.4 Research questions The overall analysis and discussion of the research will in particular revolve around the following vital questions. 1.4.1 What are the sub-city’s revenue sources? And does it have the autonomy to determine the level of revenue generation within its boundary? 1.4.2 Why did the sub-city fail to meet annual revenue collection plans expected to be collected every budget year? 5 1.4.3 How does the sub-city formulate its annual budget (both capital and recurrent) so as to discharge its expenditure responsibilities? And does it exercise its budget setting autonomy or where and how to spend its revenue? 1.4.4 Why is the sub-city unable to improve the quantity as well as the quality of public service provisions to the extent/level of its constituents demand? 1.4.5 What is the purpose of intergovernmental transfer/grant and its effect on the subcity’s tax collection effort? 1.5 Scope of the study The aim of this study is to thoroughly examine and understand the practices as well as policy mandates of fiscal powers and functions in Bole sub-city since the devolution of public service delivery powers to subordinate tier of Addis Ababa city administration in 2003. Its scope is thus limited to the sub city’s overall fiscal functions and/or responsibilities and the intergovernmental relation it has with Addis Ababa City administration and the fourteen woredas which are under the direct control and supervision of Bole sub city. 1.6 Significance of the study The study will provide an insight on fiscal decentralization in Addis Ababa city administration and the practice of fiscal power devolved to subordinate tier of the city, especially at sub-city level. It will also provide an alternative solutions or recommendations to the sub-city’s fiscal functions and may serve as a valuable input for future policy directions in dealing with the city administration overall fiscal system. Furthermore, it may assist researchers who are interested to engage in further studies within the scope of this study and may use it as part of their data sources. 1.5 Limitation of the study To find similar research materials within the scope of this study, in particular within Addis Ababa city administration fiscal system, was difficult. The research, thus, might have to be done from scratch as if it is the first in its kind - but this doesn’t mean there is no single research made so far. On the other hand, the subject matter under study was not as such well familiar to research 6 participants (respondents) and it consumes much of the researcher’s time in introducing the concept and its benefit in particular to woreda level questionnaire respondents. 1.6 Organization of the paper This paper has five chapters. The first chapter begins with an introductory part and gives a highlight on the subject under study followed by statement of the problem, objective of the study, research question, scope of the study, significance of the study, limitation of the study and a description of organization of the paper. The subsequent chapter briefly outlines review of literature on the subject matter of the study. Chapter three deals with research methodology and chapter four contains the data analysis and discussion part of the study while Chapter five deals with conclusions and recommendations. 7 CHAPTER – TWO 2. LITERATURE REVIEW 2.1 Decentralization Recent studies indicate that since 1990s decentralized government institutions are better functioning in the process of delivering differentiated local services and products than ever before. In this decentralized system the role of national government entities in deciding public affairs related to non-central or local preferences is much less than the traditional centralized form of government. Scholars use a verity of synonymous terms in their research to express the notion decentralization and among others “multi-level government, de-centered government, multiple centers government, dispersed government, sub-national government etc” are the most widely used terms (Schneider 2003). Generally speaking decentralization is the devolution/transfer of power, responsibility and functions away from the center to subordinate tier of governments. More specifically it is “the transfer of authority and responsibility for public functions from the central government to subordinate governments or quasi-independent government organizations and/or the private sector” (World Bank 1999, p: 2). To Falleti (2004), decentralization is a process and policy reform that transform responsibilities and resource to sub-national and lower level governments. Peoples’ conceptual understanding towards centralization and decentralization is somehow under illusion and erroneously interpreted as two opposite extreme issues. However, centralizationdecentralization entails the degree/extent to which government power/authority and resources are concentrates at the center or dispersed to sub-national governments, respectively, both geographically and politically. World Bank (1999, p: 5) describe the nature and the factors that could determine what to centralize and decentralize in the following manner. Centralization and decentralization are not either-or conditions. In most countries an appropriate balance of centralization and decentralization is essential to the effective and efficient functioning of government. Not all functions can or should be financed and managed in a decentralized fashion. And even when national governments decentralize responsibilities, they often retain important policy and supervisory roles. 8 During the 1960s some countries and since 1980s many more countries adopted some form of decentralization as a solution to the multidimensional internal as well as external pressures they face (World Bank, 2008). Problems and pressures that push for decentralization include; failure of central governments to sufficiently and effectively responded to local needs and preferences, growing awareness on wider regional variations in their development needs, the movement toward more democratic government and local communities demand to control and use their own resources. Moreover, urbanization and the growth of large and complex cities’ need for more responsive system of local governance, failure of the notion ‘big government’ and donors’ pressure to adopt decentralization and ‘privatization’ as a way to improve public service delivery and of getting around obstructions at the centre demands the realization of decentralized powers (Schneider 2003, Tanzi 2010). Among other things, international influence was seen as highly influential and is best described by Nolan (1987) as decentralization was taken as major policy direction by a number of influential and developmental organizations like United Nations, World Bank, the OECD, USAID and etc. All in all political concern was said to be the dominant motive for decentralization. The adoption and implementation of an appropriate type and form of decentralization can create an enabling environment that would open the opportunity to alleviate decision-making bottlenecks that are often caused by central government’s ‘one-size-fits-all’ planning and controlling of political, economic and social functions. 2.1.1 Types of decentralization According to Falleti (2005), types of decentralization fall into four overlapping and/or interrelated groups/aspects of decentralization. These are: x Political decentralization: it entails constitutional amendments and electoral reforms to devolve electoral capacities to sub-national actors. If implemented appropriately, it rewards local community/citizens to elect their representative through free, fair and transparent elections so as to enable elected officials to freely make public decisions to meet local needs and preferences. Hence, it ensures local self government and increases community participation and downward accountability. 9 x Administrative decentralization: it is the devolution of decision making power to subnational governments so as to deliver effectively and efficiently social services (i.e. health, education, housing, social welfare and etc.) and other related activities at local x level. Fiscal decentralization: it is the transfer of fiscal resources and decision making power to sub-national governments with the aim to increase revenues and spending autonomy of x sub-national governments. Market decentralization: it is the shift of responsibility from the government, for the functions of public owned services that had been partially or exclusively the responsibility of the government, to the private sector through privatization and deregulation mechanisms. Hence, it involves the private sector in the financing and delivery of government services and enables them to provide local capital markets. 2.1.2 Forms or models of decentralization According to World Bank (1999) and (et al.), traditionally there are about three well familiar intertwined forms or models of decentralization called; Deconcentration, Delegation and Devolution. In fact some writes add the fourth model “Mixed or hybrid”, as a separate form. But as it is the mix of the other three forms most literatures don’t consider it as unique model. 2.1.2.1 Deconcentration: it is the weakest form of decentralization, and is the redistribution of decision making authority, financial and management responsibility to regional or sub-national levels of the same central organization. There is no real transfer of authority between levels of government. 2.1.2.2 Delegation: a more extensive form of decentralization. It is the transfer of decision-making authority and responsibility to semi-autonomous entities which are not wholly controlled by the central government, but are ultimately accountable to it. 2.1.2.3 Devolution: also refereed as political or democratic decentralization. It is the most advanced form of decentralization, and is the transfer of authority and responsibility to public bodies elected by their constituencies and entities of the civil society with some degree of local autonomy. 10 2.1.2.4 Mixed or hybrid: In practice, the above forms of decentralization can be used in a variety of ways on the basis of the type of function to decentralize and may apply optimally at each level of sub-national government. For instance, education could be better performed if it is under deconcentration, while health thrives under delegation and agriculture can be more productive if it is devolved to lowest tier of government. 2.2 Fiscal Federalism Fiscal federalism is all about the allocation of fiscal rights and responsibilities across different levels of governments. It encompasses decisions about; public spending, revenue raising, intergovernmental transfer or grant, borrowing, and so on. Nevertheless, in most cases the decisions are not purely the product of logic or rationality, rather they are extremely political in nature and involves representation of citizens and the interest of individual, group and political parties. The main goal of fiscal federalism is to create an optimal institutional capacity, fiscal framework and an enabling environment across levels of government to aid the realization of efficiency through improved allocation of funding expenditure responsibilities and effective provision of public services in each tier of government. The appropriate distribution of government functions across levels of government will enable to meet diverse preferences of citizens (i.e. decentralization) and enhance economies of scale in the provision of heterogeneous public services and macroeconomic stability (i.e. centralization). More importantly, it should be note that, the provision of local outputs that are differentiated according to local testes, preferences and circumstances results higher level of social welfare gain than centrally determined uniform levels of outputs across all jurisdictions (Oates 1993). In a federal fiscal system, theoretically, decentralized local governments are in a better position to determine the level as well as the quality of public services in accordance with local needs and preferences better than central governments. Centralized governments, on the other hand, can determine and produce uniform level of out puts across jurisdictions that have elements of externalities, economies of scale and scope more efficiently than produced individual by local governments. Obviously the more decentralized economic functions are the greater the policy 11 and fiscal autonomy enjoyed by local governments. In practice decentralization of fiscal powers to sub-national and/or local governments has been implemented and exercised in both unitary and federal regimes. However their legal bases and fiscal decision making autonomy differs considerably. This is to mean federal governments’ constitution protect sub-national governments’ discretionary decision making power over their needs and preferences. Whereas unitary sub-national governments are not constitutionally empowered and are very much dependent on the good will of central governments (World Bank 1999, Oates 2008). 2.3 Fiscal decentralization 2.3.1 Essence and theoretical framework for fiscal decentralization According to James kee (2003), the essence and theoretical case of fiscal decentralization goes back to “the 17th and 18th century philosophers, including Rousseau, Mill, de Tocqueville, Montesquieu and Madison” where “democratic governments were seen as the principal hope to preserve the liberties of free men”. However, numerous scholars in the field agree that theoretical examination and formulation of fiscal decentralization principles were believed to be introduced by Tiebout (1956), Musgrave (1959) and Oates (1972). Tiebout’s paper- entitled ‘A pure theory of local expenditure’ – was mainly deals with the issue of local public finance and the importance of identifying and knowing community choice so as to estimate demands for local public goods/services (i.e. education, sanitation, fire protection etc). His model assumes there are no as such spillovers of benefits across communities. Musgrave’s famous book entitled ‘The theory of public finance (1959)’, outline divisions of governmental economic activity into three branches of allocation of resources with the objective to; ensure the efficiency of public service provisions, enhance the distribution of income through integrated tax and intergovernmental transfer system, and to stabilize the overall economic condition of a given country. Oates in his book ‘Fiscal federalism (1972)’ recognizes that, one of the fundamental issues in dealing with federalism is the need or the appropriate assignment/division of government functional responsibilities across various levels of governments. He also outlines the tradeoff between the benefits of joint consumption and non homogeneity of preferences across sub-national governments (Tiebout 1961, Mikesell 2006 and Vulovic 2011). 12 Economists and public administration scholars define fiscal decentralization somehow in a similar fashion. Bahl (2008, p: 4-5) for instance define, “Fiscal decentralization is all about the central government’s passing budgetary authority to elected sub-national governments in the form of the power to make taxing and spending decisions”. And to kee (2003, p: 3), fiscal decentralization is, “… the devolution by the central government to local governments (states, regions, municipalities) of specific functions with the administrative authority and fiscal revenue to perform those functions”. Moreover it is the empowerment of people, who are responsible for the fiscal aspects of local government, by the empowerment of their local government which in turn is empowered by higher level or central government. On the other hand, economists and political science scholars claim that the task of distributing taxing powers and expenditure responsibilities among central, regional and local governments is an extremely challenging issue in particularly in developing countries. However their focus of emphasis in fact difference and manifest their respective discipline and intent to be achieved. “Economists generally focus on issues of efficiency and equity, while public administration and political science scholars tend to focus on distribution of powers, responsiveness and accountability, and tax competition and coordination” (kee 2003, p:4). Economists further outlined a framework that would help to analyze the functions and roles of governments in the distribution of taxing power and expenditure responsibility at each level of government. The frame work mainly employs the principle “finance should follow functions” (Bahl and Martinez, 2006, p: 16). Hence, certain expenditure assignments (public functions) to a particular level of government should always accompanied by sufficient financial resources enough to discharge those devolved functions and supplemented by determination of central government transfers and/or grants (Bahl & Martinez (2006). However, in practice as opposed to the ‘finance follows function’ rule, most often central governments prefer to share a portion of their aggregate revenue with sub-national governments rather than devolving revenue raising powers. Similarly the implementation phase is indeed challenging and needs comprehensive but step-bystep or phased reform strategies. It involves a lot more than fiscal issues like the arrangement of public institutions and civil service and the issue of electoral system. Thus, countries need to have well designed and all inclusive strategies so as to alleviate unforeseen transition problems 13 that may arise during the life of the implementation. Bahl (2008) indicates various elements that need to fit together into a comprehensive plan for the effective implementation and realization of decentralized fiscal powers. Among of which local government accountability to local voters is one of the most crucial element of a decentralized system of governance. Thus local councils should have to be locally elected through popular vote of local constituents and elected councils in turn appoint local chief officers. In addition significant set of expenditure responsibilities, sufficient amount of taxing powers, budget making autonomy, transparency and a hard budget constraint are also the necessary conditions for the effective and smooth undertaking of decentralized fiscal powers (ibid). 2.3.2 Functional assignment Richard Musgrave (as cited in kee 2003) suggested the three fundamental functions of government that are to be assigned at different level of government. The classifications of these functions (i.e. macroeconomic stabilization, income distribution and resource allocation) dictate and help to assign which taxes to which level of government. 1. Stabilization function: it involves the role of taxing, spending and monetary policy in stabilizing the overall macroeconomic functions. It is widely agreed and acceptable that macroeconomic stabilization function should be assigned to the national government with the associate broad-based tax assignment suitable and sufficient enough for the efficient undertaking of its responsibility. 2. The Distribution function: involves the role of government in distributing income, wealth or other indicators of economic well being to make them more available to all citizens. 3. The allocation function: it deals with government’s role in deciding the allocation of resources or the mix and level of public and private goods that are provided by the economy or by government. Each level of government may be more efficient in delivering certain government goods and services. (E.g. national defense and national health research best delivered by national government, and fire and police protection more suitable for local governments). 14 Hence, to satisfy both the demands of economists and public management concerns; there must have careful analysis and design in the allocation process and consider and maintain the match between expenditures responsibilities and local revenues. Similarly reducing vertical imbalance, enhance horizontal equity, recognizing externalities or spillover effectives, public services efficiency and other related issues. Besides, in dealing with public management concerns, the role of each level of government should be clearly defined and due consideration has to be given if concurrent or overlapping taxes and roles exist, and the system should allow local governments be responsible and accountable (to voters) for the service they delivered. 2.3.3 Fiscal autonomy and Fiscal balance Fiscal autonomy is all about the degree of decision making power each level of government possess so as to determine the quantity as well as quality of public service provision and the amount of revenue to be raised within their jurisdictions. Autonomy, in the context of fiscal decentralization, can be defined as the freedom/discretionary power of sub-national governments to determine their own revenue and expenditures. The issue concerning ‘amount of discretionary power or autonomy’ that has to be devolved to regional and local levels of government don’t have yet precise, one-size-fits-all and polished definition or conceptual frame work. Consequently, in some countries local government’s discretionary autonomy is restricted to expenditure mandates, limited or no taxing power and provisions of conditional grants. On the other extreme countries allow their local governments an extended autonomy that will enable them to shape and finance their budget to a much greater extent (Bahl 2008, Dafflon and Madies, 2011). The amount of autonomy devolved to a specific level of government usually measured through a simple ratio of local own revenue to local expenditure. If all expenditure responsibilities are financed by revenue sharing or intergovernmental transfers, instead of local government’s own source revenue, that particular level of government’s autonomy or discretionary power to determine its level of expenditure is insignificant. In contrast, if all expenditures are financed by local government own revenue, the freedom to decide on the financing of expenditure requirements is very high (Dafflon, Bernard and Thierry 2013, and OECD-KIPF 2013). 15 In general, according to (Bahl and Martinez 2006, p: 22), “if all financing is from revenue sharing and other forms of transfers from higher level governments, there is a danger of the lower level government becoming a spending agent for the center. Such an arrangement can give sub-national governments less discretion in deciding how much they will spend, and how they will spend it in the case of conditional grants”. Fiscal autonomy can be divided into budget autonomy, which is basically concerned with the local spending, and financial autonomy that is concerned with financial resource that can be obtained through the local government’s own means. However, having significant amount of own local revenue source alone is not a key issue, unless it is accompanied by significant amount of discretionary power that will allow local governments make choices about the level as well as quality of public services and use of those resources without any higher level government intervention or pressure. On the other hand fiscal balance encompasses both horizontal and vertical intergovernmental fiscal system and is said to be vertically balanced when each level of government, in aggregate, has the resource necessary to finance at least minimum level of public services within their respective jurisdictions. Horizontal balance refers to the ability of individual sub-national or local governments to provide minimum level of public services to their respective constituents with the resource generated within their localities. Under normal condition horizontal imbalance occurs when the dispersion of revenue potential (sources) varied widely across sub-national governments (Bahl 2008). Resource in this context includes sub-national government’s own revenue (taxes, charges, fees, penalties and etc.) and intergovernmental transfers. 2.3.4 Drivers for fiscal decentralization There are a number of reasons why fiscal decentralization is so in need in today’s volatile socioeconomic and political environment. If governments have the desire and commitment to satisfy heterogeneous and competing needs and preferences of their various constituencies, an appropriate form of policies and reforms like fiscal decentralization are to be implemented as a response and be able to strengthen their regional and local governments. Tanzi (2010, P: 315) outline some essential factors that can pressurize central government and lead to decentralized fiscal arrangements. Those factors described by the author include “ (a) historical, cultural or 16 religious differences across regions of the same countries, as for example exist in Nigeria, Sudan, Iraq and other countries; (b) linguistic differences across regions, as in Switzerland, Canada, Belgium and other countries; and (c) ethnic, or racial, differences, as in South Africa”. In addition to the stated factors authors like kee (2003) (et al.) suggests some more driving forces for decentralization and push nations to further decentralize fiscal powers to local governments. a. Central governments increasingly found out that it is impossible for them to meet all of the competing needs of their various constituencies, and are attempting to build local capacity by delegating responsibilities down to their subordinate tier of governments. b. The notion that decentralized governments can deliver public services at a low cost and better quality and the feeling that fiscal decisions made at the local level better reflects local needs and preferences. c. Regional and local political leaders demand for more financial autonomy so as to effectively and efficiently discharge their expenditure responsibility and the demand for more local self governance. In general, to create public institutions capable of providing public services in an effective and economic manner is not an easy task. Employing institutional reforms in a systemic or comprehensive way that takes into account local differences in culture, environment, and socioeconomic variations or overall local circumstances is very essential. Since local governments are closer to the people, they have superior knowledge on the needs and preferences of their constituents and are in a better position to identify and possess that information easily and accurately at lowest costs than central government (Oates 2005). Similarly, De Mello (2000) also describes the benefits of decentralized local financing as a means to ensure downward accountability and transparency. Ultimately, all stakeholders in particular the main players – citizens and governing bodies– can reap the fruits of appropriately design and implemented decentralization reforms, if they create a strong but limited national government and independent sub-national governments that shall ensure downward accountability, transparency and responsiveness to citizens. 17 2.3.5 Fiscal decentralization pitfalls Fiscal decentralization is not something without pitfalls and is not cure for all sub-national and local governance problems. Edwin kee (2003) summarizes some key points, in which discussed by various scholars in the field, that needs due consideration in the process of fiscal decentralization reforms in particular in developing nations and countries having transition economies. These are: a. Taxpayers may have insufficient information or no political power to pressure local policymakers to make resource-efficient decisions. b. Local politicians may be more corrupt than national politicians or at least find themselves in more corrupting situations. c. The quality of national bureaucracies is likely to be better than local bureaucracies. d. Technological chance and increased mobility may reduce the number of services that are truly “local” in nature. e. Local governments often lack good public expenditure management systems to assist them in their tax and budget choices. f. Fiscal decentralization may exacerbate a central government’s ability to deal with structural fiscal imbalances. 2.3.6 Aspects or pillars of fiscal decentralization Sub-national governments demand for more fiscal power and responsibility presumably shift the attention and action of central governments and begun to carefully deal with how to carry out fiscal arrangements among levels of government in determining the fiscal responsibilities of subnational and local governments (Tanzi 2010). In theory fiscal decentralization subdivided in to four interrelated key elements –referred by different scholars as pillars, aspects, dimensions or building blocks of fiscal decentralization– called the assignment of expenditure responsibilities or functions, allocation of revenue sources, designing intergovernmental transfers and structuring sub-national borrowing and/or debt (Bahl 2008, et al). In accordance with the rule “Finance follows function” the discussion of aspects/pillars of fiscal decentralization will begin with 18 expenditure assignment and followed by subsequent sub-sections of revenue assignment, intergovernmental transfer and borrowing. 2.3.6.1 Expenditure assignment In the expenditure assignment process, the efficiency as well as effectiveness of public service delivery (i.e. economies of scale & scope, local preferences and proximity to service delivery) are the major elements that would help to determine which public function optimally performed by which level of government. Due to the very nature of variations in local preferences and public service delivery costs, the assignment of expenditure responsibilities to the lowest tier of government is believed to be the best way to enhance welfare maximization and efficiency gains. The primary role of a decentralized local government is thus to provide public goods/services whose consumption is limited to their respective geographic area or jurisdiction (Oates 2005, Bahel 2008). However, these doesn’t mean all functions have to assign to the lower level of government, particularly those function that have external or inter-jurisdictional spillover effect and economies of scale in the provision of public services should have to be assigned to the central or national government (i.e. interregional roads, clean rivers). Similarly, central government sponsored special programs may delivered in collaboration with sub-national or local government. In this case the intended output of local good and service delivery programs and their associated financing comes from higher level government and the actual service provision may undertaken by sub-national government on behalf of higher level government (Bahl 2008). It is sensible to recall here the issue of accountability and give much emphasis to the principle ‘governments at all levels should be accountable to their citizens (voters) for their actions’ (ibid). Hence in the case of higher level government sponsored programs, the higher level government assume direct responsibility for a part of the function and exercise policy and regulatory role, while sub-national governments at different level assume responsibility for their appropriate and efficient execution of the program or service delivery (e.g. Health, education and infrastructure sectors). Moreover, it is important to clearly and precisely describe divisions of functions across levels of government not only to ensure accountability but also to avoid unnecessary duplication of effort/responsibility and reduce the ambiguity of corresponding legal challenges. 19 A. Spending and/or Budgeting power Spending power refers to the degree of autonomy that sub-national governments possess to make choices over the quantity and quality of their public service provisions or simply it is the extent of decision making power and control over their budget. Customarily sub-national government spending power was taken as the extent of sub-national share (amount) of expenditure in general government spending. However, in recent decades the term spending power encompass subnational governments’ ability to determine their own spending policy without (or with minimum level of) higher level government intervention. The assignment of an appropriate amount of spending power to sub-national government – the autonomy to decide on how and where to deliver public services – is a necessary precondition for the effective implementation of fiscal decentralization (Bahl 2008, OECD-KIPF 2013). Budgeting autonomy encompasses the whole budgeting process from formulation up to the approval stage. “Budget maximization is taken here to serve as a proxy for a variety of objectives including enhancement of power and influence, large staffs, and higher salaries” (Oates 2005, p: 355). Though, in theory, devolution of expenditure assignment to lower tier of government brings public sector spending decision closer to citizens and enhances accountability and transparency, in some cases it might be used inappropriately to make decisions in favor of higher level government and ultimately disregard local needs and preferences. Hence care must be taken at the designing stage, when assigning public functions across tier of governments, and it is important to ensure whether sub-national governments exercise genuine decentralization or devolution of expenditure responsibilities that will enable them to enforce their choice on the level as well as quality of public services provisions within their scope of administrative boundaries (Dafflon & Madies, 2011). 2.3.6.2 Revenue assignment Governments at all level heavily rely on a wide verity of tax instruments available to their revenue requirements so as to run government offices, increase and execute public development activities and ultimately meet their citizen’s overall needs and preferences such as education, health, social assistance and etc (Tanzi 2010). Most often uneven distribution of natural and other resources across regions and huge developmental differences between the richer and poorer 20 regions creates conflict of interests in particular between the richer regions and national governments’ redistribution (from the richer to the poorer) policy. According to various comparative study findings, this regional income differences and reallocation of financial resources across regions have created political differences in some countries like; Belgium, Canada, Italy, Spain, Nigeria, and others (Tanzi 2010). Revenue in this context encompasses taxes, non-tax, intergovernmental transfers and/or grants. Revenue assignment entails the distribution of taxing power among levels of government and deals with the issue of which types of taxes are most suitable for use by each level of government. According to Taliercio (2005, p: 107) in designing sub-national or local revenue system countries need to consider at least the three well known central dimensions –“the assignment of revenue sources among types of government, the degree of autonomy with which sub-national governments can exercise their assigned authority and the efficiency of the revenue administration system”. As a result properly designed and/or structured revenue assignment system is required and there must have a rule that govern and clearly describe which level of government is authorized to levy which taxes and their associate discretionary power each level of governments have in levying and administering those taxes. A. Optimal revenue assignment As said earlier, the revenue assignment among levels of government should follow the notion or principle “finance follows function”. Nonetheless, for the optimal and appropriate allocation of revenues across all tiers of government, scholars outlined some more criterions that need to be considered while assigning taxes to each level of government. The process of tax assignment to sub-national governments in some countries is mere judgmental rather than strictly following formalized principles. Empirical evidences from comparative tax administration studies indicates that, among other things equity and efficiency issues are widely used to arrive at informed decisions. For instance, tax bases that are efficient and simple to administer (like property tax) and non-tax revenues such as user charges, fees, royalties and rents can be assigned to local governments. However, due to the narrow nature of these tax and non-tax revenues, local governments may face financial deficit to carry out their expenditure responsibilities and may seek intergovernmental transfers or subsidies from higher level of government (De Mello 2000). 21 In addition, there are economic principles, outlined by World Bank (1999) document, that need to be considered and would assist in deciding which taxes to assign to which level of subnational of government. Those principles are; Efficient functioning of internal common market, the issue of national equity, Fiscal needs of each level of government and the associated tax administrative costs. B. Taxing autonomy The assignment of taxes between different levels of government entail national as well as subnational governments’ collective responsibility and control over tax rates, tax bases and revenue sharing formula between central and sub-national governments. According to OECD-KIPF (2013), the level of sub-national governments’ taxing autonomy varies widely from country to country and it can be classified into five categories on the bases of their taxing power from highest to lowest as follows; category “a” full power over tax rates and bases, “b” power over tax rates, “c” power over the tax base, “d” tax sharing arrangement and “e” no power over rates and bases at all. “The term ‘tax autonomy’ captures various aspects of the freedom sub-central governments (SCGs) have over their own taxes. It encompass features such as sub-central governments’ right to introduce or to abolish a tax, to set tax rates, to define the tax base, or to grant tax allowances or reliefs to individuals and firms” (OECD-KIPF 2013, p:16). It must be note here that a mere increase in taxing power to sub-national and local governments might not necessarily lead to higher level revenue mobilization. In order to make the devolved taxing power more productive, local governments need to effectively work hard on the following crucial preconditions; improving local citizens awareness towards the benefit of the taxes they pay and their associated influence on the quantity and quality of public service provisions within their jurisdiction, hard work to alleviate the fear of central Ministries –to alleviate the notion ‘allowing taxing power to sub-national governments might reduce the future space of the central government’ (Bahl 2008). C. Tax sharing arrangement In essence tax sharing arrangement promotes vertical balance, horizontal fiscal equalization and ensures citizen’s equity in accessing at least a minimum level of public services across a given country. Under federal form of government most tax sharing arrangements don’t allow a single 22 sub-national government to set tax rates and tax bases solely by itself, rather it is the consensus and willingness (at least in principle) among levels/sub-national governments that lead to the modification of the tax rates, tax bases and revenue sharing formula. “Tax sharing is an arrangement where tax revenue is divided vertically between the central and sub-central government as well as horizontally across sub-central governments” (OECD-KIPF, 2013, p: 22). Moreover, though tax sharing somehow limits the autonomy of sub-national governments’ taxing autonomy, by virtue provides fiscal resources to sub-national governments while at the same time maintain macroeconomic stability. Tax sharing arrangement design and analysis encompasses various dimensions, among of which, the type of tax that is shared, the legal procedures involved in changing the formula, and the frequency of periodic formula adjustment in line with the objective of horizontal equalization are the most widely used across countries. According to Smoke (2013) other contextual factors that need to be considered while undertaking decentralized reforms include; political will, level of development, public sector capacity, form of government (unitary verses federal government), civic capacity and etc. D. Revenue administration The assignment of revenue administration responsibility across tiers of government vary widely from country to country –ranging from highly centralized, where national tax authority is responsible for the collection of central as well as sub-national/local decentralized taxes to highly decentralized where sub-national and local governments are responsible to collect their respective own source revenues. According to Taliercio (2005, p: 121) the assignment of local revenue administration can be seen from the point of view of autonomy and efficiency and he summarize the four tax administration models in a decentralized context, which were originally outlined by ‘Ahmad (1997)’. These are: “central tax administration with revenue sharing, central tax administration with assignment of taxing powers to different levels of government, multilevel administration with revenue sharing, and self-administration by each level of government”. Martinez-Vazquez (2005, p:3-4), on his part believes that, the arrangement of revenue administration or which level of government to administer which taxes heavily relies on the tax administration’s objective. And he further explains the two fundamental objectives of tax 23 administration in the following manner. “The maximization of revenues subject to the administration costs and compliance costs constraints (or the efficiency objective) and the accountability of government elected officials to taxpayers (or the accountability objective)”. And since the “fundamental task of any tax administration is to collect revenues with lowest possible costs” Martinez-Vazquez (2005), all fiscal decentralization reforms don’t necessarily accompanied with decentralized tax administrations authorities or responsibilities. Generally speaking sub-national as well as local governments are relatively less capable in terms of both human capital (inexperienced and less paid human resource), and inability or too expensive to acquire up-to-date technology and equipment required for the operation of the tax administration and lacks economies of scale and scope. On the other hand, national government revenue authorities can pay relatively higher salaries than sub-national governments and better provide employment benefits to attract new and retain their experienced expertise for long and can benefit from economies of scale and scope (i.e. key to reduce total administrative and taxpayers’ compliance costs) through the efficient utilization of their resources across the nation. However some exceptional taxes like property taxes can better administered at local level. This is due to the assumption that local governments can have superior knowledge on the actual local circumstances and conditions and are in a better position to effectively and efficiently enforcing those taxes. The key question here is that, whether there is the possibility to centralize certain tax administrative functions (such as; registration, collection and compliance) without reducing local autonomy or to design and implement an optimal mix of national and sub-national/local tax administration. This may include sub-national or local governments control over the level of tax enforcement activities so as to increase their revenue collection margin. Moreover, in some countries like Indonesia and Philippines, larger regions/states or provinces having greater tax administration capacity take the tax collection responsibility of smaller regions that have weak capacity, for fee or without fee, and they also transfer some revenue to lower level governments Taliercio (2005). Sub-national and/or local tax administration support program sponsored by national government agency would be an option to improve local efficiency while simultaneously preserving local autonomy. Similarly the issue of cooperation and coordination between various tax authorities 24 (exist at each level of government) among others are the crucial factors in tax administration, in particular when each tier of government is responsible to independently collect taxes and enforce locally ratified tax laws. 2.3.6.3 Intergovernmental transfer Intergovernmental transfers play a crucial role in financing sub-national government functions or expenditure responsibilities and address a variety of issues and higher level government intentions. The mandate to decide such decisions could be of constitutional, presidential decrees or short term legislations (Bahl 2000). The fundamental aim of intergovernmental transfers is on one hand, to subsidize sub-national government services and on the other hand to narrow or equalize fiscal disparities that may exist across sub-national governments. Rules and conditions/strings attached to intergovernmental grants vary widely, ranging from transfers that grant full autonomy and come close to tax sharing to grants where central government retains tight control. In most developing countries, the revenue of sub-national governments is highly dependent on intergovernmental transfers. This in turn negatively affects the efficiency as well as the effectiveness of local public service provisions and significantly reduces the decision making power of local government officers (World bank 1999 and OECD-KIPF 2013). According to Bahl (2000, p: 1) “Transfers are a compromise in that they allow the central government to hold control over the public financing system while they offer a way to channel money into the budgets of provincial and local government”. Governments introduce intergovernmental transfer for a number of “good and not-so-good” reasons. Those intergovernmental transfer objectives categorized under “good” or proper justifications include: Vertical balance: it arises when sub-national governments’ devolved revenue sources mismatch with expenditure responsibilities. When expenditure requirements are insufficient to cover at least minimum level of public services within a specific sub-national government, the central government has to either grant more revenue raising power or transfer additional funds from the center. However to fill the said gap national governments most often prefer intergovernmental transfer over granting additional revenue raising power. Equalization: the existence of wider fiscal disparities among sub-national governments lead to the adoption of equalization policy by a number of developing and transitional governments. 25 According to those governments believe intergovernmental transfer is a cure for such differences and distribute what they collected from the richer regions or sub-national governments to the poorer regions through the use of formulae or other revenue sharing approach. Externalities: it refers to those services that have substantial external benefits to other or more than one sub-national government. The justification or the claim for intergovernmental transfer in this case is that sub-national governments lack interest to spend more on such services and intergovernmental transfer has to be in effect to fill the gaps occurred by under spending. Administrative: the assumption is that, relatively, central governments have better capacity to assess and collect taxes and carry out the allocation to sub-national governments efficiently through the use of intergovernmental transfers systems. But what is not acceptable is that there are some taxes –like property tax, user fees and local license- that can be better administered and collected at a higher collection rate at the local level. Contrary to the above good justifications, there are also some well familiar reasons categorized under “bad” justifications in which central governments stick to intergovernmental transfers instead of devolving fiscal autonomy to sub-national governments. The first is the denial or lack of political commitment to give local governments’ revenue raising discretionary power and being reluctant in controlling local governance. The second reason dictates enforcement of uniformity across the country and resistant to diversity as a goal of central government. The third reason is about the believe that local governments are more corrupted than the center and granting revenue raising power will lead to wastage of limited public resources. The fourth and the last reason might be local governments’ demand or the need to finance their budget deficit via intergovernmental transfer system. Moreover Bahl (2000) point out a number of intergovernmental transfer forms available for governments and he further underlines that the right choice among those forms very much depends on the kind of objectives governments keen to achieve or accomplished. A. Horizontal sharing It is evident that the distribution of economic or taxable potential across regions or political administrative boundaries of a nation varied widely all over the world. According to Tanzi 26 (2010, p: 318), “… Economic inequality across regions creates the main rationale for horizontal fiscal equalization” and is, in fact, considered as the fundamental reason for choosing “…. national policy of income redistribution” by central governments. In practice developing countries use the four commonly known horizontal sharing methods called; formula approach, cost reimbursement approach, derivation approach and an ad hoc approach (Bahl 2008). 1. Derivation approach: in this method of revenue sharing, the amount each sub-national government expected to receive in the form of total grant pool, as a share of a national tax, is determined by the amount of tax collection within their respective geographic jurisdiction (e.g. China, Russia ...). If appropriately design and implemented derivationbased sharing might insure one of the fundamental principles of economic development goals of decentralization. Since the amount of revenue sharing to sub-national governments is determined by the amount of their tax collection, it stimulates and or increases the tax collection efforts of sub-national government. It is also, relatively, more productive in local budgeting and fiscal planning than would most other forms of intergovernmental transfers. However, if the revenue potential and economic disparity among sub-national governments is very wide, revenue sharing on the basis of derivation might not be the best method to be used as an equalization policy. “It is important to note that this is a transfer and not a local tax, because the local government has no control over the tax rate or the tax base” (Bahl 2000, p: 9). 2. Formula grant approach: it is the second common approach that uses some quantitative criteria to allocate the pool of revenues or intergovernmental transfers among subnational governments. The reason why governments choose formula based sharing is to enhance transparency in the distribution of grants. But most of the time elements of the formula and their associated weight are determined by the central government and are exposed to biasdness and might lead to erroneous conclusions. Moreover, it is difficult to get in particular some information in time so as to make the decisions objectively and its administrative cost is more costly than other forms of revenue sharing approaches. 3. Cost reimbursement approach: in this method of revenue sharing the higher level government determine the functions where the money will spent –conditional grant, or it might be matching grant which specifies the degree of cost sharing, it might include as part of the conditionality the standards of performance, construction, employee 27 qualification and etc. These conditionality grants limit the budgetary discretion of subnational governments and since the implementations of these grants are monitored by higher level governments who provide the grant, it incurs a significant amount of administrative costs to the higher level government. 4. Ad hoc sharing: in this type of revenue sharing method the higher level government each year decides how it will distribute grants among its subordinate governments. There is no as such an objective criterion, rather it is more of political driven and the administrative body might decide on the distribution based on his interest or the interest of political leadership during that fiscal year. From the point of view of sub-national or local governments, almost by all standards of a good intergovernmental transfer an ad hoc grant is undesirable. However from the central government point of view, an ad hoc sharing is more preferable in that it can enforce its priorities over that of sub-national government and is easier to effectively control. B. Types of intergovernmental transfer or grants There are different types of intergovernmental transfers that have both desirable and undesirable effects on the financing of sub-national and local government expenditure responsibilities. For instance, some may stimulate and promote local spending, some have equalizing objectives, some are substituted for local revenue effort, and some may lead to more local government fiscal autonomy than others. In many instances countries design and implement intergovernmental transfer/grant systems without having clear objectives or clearly describing what the system is intended to accomplish. Grants can be divided in to earmarked and non-earmarked grants with regard to sub-national government fiscal autonomy and both grants in turn sub-divided into mandatory and discretionary grants which indicate the legal basis for their allocation. The main dividing line separate earmarked from non-earmarked grants; a distinction crucial for assessing sub-central fiscal autonomy. Both types of grants can be divided further into mandatory and discretionary transfers, reflecting the legal background that governs their allocation. Earmarked grants may be further subdivided into matching and non-matching grants, i.e. whether the transfer is linked to SCG own expenditure or not, a distinction important for sub-central incentives to spend. A final subdivision is between grants for capital expenditure and grants for current expenditure. On the non-earmarked side grants may be further subdivided into block and 28 general purpose grants, where the later provide more freedom of use; since both forms are unconditional, the distinction often collapses (OECD-KIPF 2013, p: 25). Grants can also used as a tool to execute specific government functions or designated policy areas like education and health where the central government retain considerable control over funding and regulating regional and local governments in providing those services. However, intergovernmental transfer may sometimes be counterproductive and vulnerable to coordination failure, if it is inappropriately design, lacks institutional clarity and transparency. In addition, instead of reducing fiscal disparity among sub-national governments, it might destabilize the overall macroeconomic system of a given country. Hence, for the effective implementation of fiscal decentralization and presumably to alleviate the stated and other related unforeseen problems, there must have prerequisite preparation measures such as; ensure the availability of expertise at sub-national level so as to effectively manage resources, fiscal system that can enhances effective monitoring of sub-national fiscal activities, strict constraints on subnational indebtedness and so forth. 2.3.6.4 Sub-national Borrowing In a decentralized fiscal system sub-national governments are expected to finance their expenditure responsibilities, at least theoretically, through their own revenue sources and/or intergovernmental transfers available to them. However, often times sub-national governments fail to comply with their allocated budget, in particular their operating or recurrent budget, and demand additional fund to finance their obligation. In such circumstances, of financial difficulties, they may take different forms or a combination of measures to settle their budget requirements such as; reduce spending, increase tax rates, debt financing through sale of bonds and/or borrowing from the public. A. Source of government debt Government debt stems from varies factors such as; the need to cover annual budget deficits where overall actual expenditure exceed annual revenue in a given fiscal year, to cover shortterm cash flow shortage -caused by time frame mismatch between actual revenue collection (current revenue) and provision of expenditure responsibilities, to finance capital projects that have intergenerational life span and to finance war and natural disaster or catastrophe 29 circumstances. Source and purpose of debt at national and sub-national level are somehow different in their nature. Debt to stabilize the macroeconomic condition or handling unemployment and maintaining financial crises are the responsibilities of national government and debt to fill short-term cash flow shortages and sub-national and local level capital project financing are most often used by sub-national governments (Mikesell 2006). Devolving borrowing power to sub-national governments on one hand and maintain macroeconomic stability on the other hand are the two competing (conflicting) but fundamental issues and interests of national and sub-national governments. Similarly scholars differ in their view towards sub-national borrowing. Advocators argue that sub-national and local governments need to have borrowing authority to finance, in particular, long-life capital projects for the provision of desired public services to their constituents. This long term debt -for long life capital projects- will be settled through generations who are actual users of the service. This issue has been better described by Dafflon (2013, p: 20) as “paying for investments on the pay-as-you-use principle”. On the other hand critics argue that inefficient institutional capacity, lack of effective national governments control and coordination failures lead to higher aggregate debt burden at national level. Thus devolution of sub-national borrowing autonomy should be restricted to a certain level, so as to not destabilize the overall macroeconomic condition of a nation (Vulovic 2011, Dafflon, Bernard, and Thierry Madiès 2013). In general debt should not violet the rule of fiscal sustainability, and it should be able to ensure that users pay for the service they consume and facilities they use but are not enforced to settle or pay others’ debt or for the service they don’t consume. The fundamental rule of debt policy is: do not issue debt for a maturity longer than the financial project’s useful life. If the debt life exceeds useful life, the project’s true annual cost has been understated, and people will continue to pay for the project after the project is gone. If the useful life exceeds the debt period, the annual cost has been overstated, and people will receive benefits without payment (Mikesell 2006, p: 586). B. Debt financing and the need to sub-national consolidation Debt level at each level of government and at national level (in aggregate) has to be to the acceptable or manageable level. When sub-national governments are free to borrow without any limits or control and fail to coordinate the debt at national level, it might lead to the undesirable 30 or negative effect of borrowing. At the extreme scenario sub-national as well as national governments may unable to met their principal and interest payment obligations within the maturity date, and most likely the debt will increase from time to time and might cause; rises in interest rates, worsen budget balances, cutting local services and increasing taxes which in turn affect the well being of citizens, and it might cause default and real exchange rate appreciation and disrupt the overall financial system of that country (Smith 2007, OECD 2013). Numerous countries including Austria, Brazil, Canada, India, South Africa, Switzerland, USA and etc apply what they called “Golden Rule” provision for capital investment as a tool to finance sub-national and local capital projects through borrowing or debt financing. However, though both opponents and proponents of sub-national borrowing agree on the potential benefit of borrowing in particular to finance long term infrastructure capital projects, they both fear that lack of effective borrowing regulatory framework, coordination failure and inefficient borrowing design that don’t consider local circumstances may still lead to long term fiscal sustainability problems (Vulovic 2011). Thus to enable stable, predictable and adequate revenues and simultaneously maintain the overall health of intergovernmental fiscal relations and not endanger the long-term macroeconomic sustainability of a nation, it is advisable to create transparent and efficient local budgeting and financial management system that would enable to monitor and control local, provincial and national debt levels. These may include central and/or higher level government direct control on annual overall individual local governments debt limits and approval of those loan terms and conditions. 2.4 Fiscal decentralization in the Ethiopian context 2.4.1 Fiscal federalism in Ethiopia The modern history of Ethiopia was believed to be begun in 1855 while Emperor Tewodros II became the king of the country. Though he was not successful in his effort to bring about military and administrative reforms, he laid dawn the foundation for modernity. Emperor Minilik II realizes the ideas and dreams of his ancestors and introduced centralized form of government administration. His successor, Emperor Haile Silassie, in turn inherited the centralized form of administration and he even make it highly centralized and institute the first ever modern fiscal system in the history of the country. In 1974 the military junta, the so called ‘Dergue’ (197431 1991), took-over power from the imperial regime and continue the centralized form of administration and fiscal system without any significant change till it’s overthrow by the insurgent in 1991 (Eshetu 1994, Bahiru 2013). Following the dawn fall of the ‘Dergue’ in 1991, the EPRDF lead government came to power and introduce a new form and system of government -parliamentary form of government and ethnic based federal system. The newly adopted federal system allows the decentralization of power and functions that was absolutely concentrated at the centre to the newly formed nine regional states and two city administrations. The dominant driving forces for decentralization include; a response to higher demand for self-rule and local autonomy, the desire to effectively engage localities in the development process, promoting economic competition among regions and etc. The 1999 World Bank report on its part describe Ethiopia’s motive for decentralization as: “In some countries, such as Ethiopia, decentralization has come in response to pressures from regional or ethnic groups for more control or participation in the political process” (World Bank 1999, p: 6). According to Taye, Tegegne & Kassahun 2007, the decentralization processes has undergo two major phases; the first phase of decentralization (first generation decentralization) was in endure between 1991 and 2001, with the objective to create National and regional governments. During this period a series of laws, including the ratification of 1994 (i.e. enter into force since the 21st day of August 1995) Federal Constitution, had been enacted and created regional states and designate federal, regional state and concurrent powers/duties and responsibilities. It also grants legislative, executive and judicial powers to the states and federal government. As of 2001 the second phase (second generation) decentralization had been in effect to further devolve decision making power more closer to citizens through the program called ‘District Level Decentralization Program’ (DLDP). “The new move is signified by redeployment of skilled and experienced personnel/functionaries to serve in local government sector offices, wereda autonomy in activity and budgetary planning, expanded freedom of operation of raising and putting to use resources originating from “own” revenue sources hiring required staff, etc” Tegegne & Kassahun, 2007). However the implementation of the second phase of decentralization was initially limited to the Amhara, Tigray, Oromia and Southern Nation, Nationalities and People regions (Tegegne & Kassahun, 2007). 32 With respect to fiscal federalism of the country, the distribution of fiscal decision making power from the center to sub-national tier of governments has been in effect with the aim to improve the performance and capacity of public sector institutions so as to improve resource mobilization, ensure efficient resource allocation, narrow and/or balance interregional economic growth and disparity, creating an enabling environment to enhance sustainable growth and development and participating the private sector in the overall socio-economic development of the nation. According to the 1995 Federal constitution, the revenue and expenditure assignment classification categorized in to federal, state and federal-state joint responsibilities. Regarding the expenditure side, federal constitution Article 94:1articulates that, “the Federal Government and the State shall respectively bear all financial expenditures necessary to carry out all responsibilities and functions assigned to them by law”. However, the federal government may provide grant as a rehabilitation and development assistance to regional states. Similarly, the revenue sharing or taxing power arrangements authorize federal and regional government to levy taxes, duties and charges in accordance with the type of taxes the federal constitution designated to federal, state and federal-state concurrent power of taxation. 2.4.2 Fiscal system in Addis Ababa city administration overview A. Background of Addis Ababa city The founding of Addis Ababa city goes back to 1886 while Minelik II became Emperor of Ethiopia. Since then the city serve as the capital city of the country. It is located about 2,500 m above sea level at 9.03o N and 38.74o E right at the heart of the country. Its altitude or the height of its position above sea level makes it the third capital city (situated at higher altitude) in the world next to Bolivia’s La Paz 3,640m and Ecuador’s Quito 2,850m. Currently it is the largest city of the country and occupies an area of 540 Km2 and is surrounded by Oromia regional state. Apart from seat to the federal government, the city is home to a number of international, continental, national and regional organizations. Those international organizations include the head quarters of African Union (AU), United Nations Economic Commission for Africa (UNECA), UN agencies –(UNDP, UNICEF, UNIDO, WHO, UNFPA, etc.), international NGO’s and more than one hundred Embassies. Due to its historic, diplomatic and political significance to the continent, Addis Ababa is often referred as “the political capital or hub of Africa”. It is 33 also inhabited by a reflection of a large and growing resident representatives of nations, nationalities and peoples from all corners of the country and sometimes called as “little Ethiopia”. According to the Ethiopian central statistics Agency (CSA), the population size of Addis Ababa by July 2016 is estimated to reach 3,352,000 of which 1,765,000 female and 1,587,000 male (FDRE-CSA August 2013). B. Addis Ababa city fiscal system overview The 1995 federal constitution has stipulated the resident of Addis Ababa full power of selfgovernment. Article 49:2 of the constitution states that “The residents of Addis Ababa shall have a full measure of self-government” (Proclamation No. 1/1995). As self-governing city, AACA has three levels of stratum; the city government, sub-city the second stratum & woreda the lower tier of government & a unit of sub-city. In the 2003 city charter the name kebele was used as the third layer of government. However, the city Mayor’s office under reference No.አአ/ከዕ/01/57.5/1, dated March 13, 2002 E.C. or (2010) notified that the name kebele has replaced by wereda and the 99 kebeles have restructured into 116 woredas. In 2012 the Addis Ababa city government executive and Municipal service organs re-establish ten sub-cities as legal person within the structure of the city by proclamation No. 35/2012. Article 63 of the same proclamation describes the bases for the restructuring and demarcation of boundaries of sub-cities, ”The delimination of sub-cities is based upon the physical, geographical position, number of population, distribution of a variety of services and resources and of administrative convenience” (Proclamation No. 35/2012). The city strategic plan indicates that by 2020 fiscal year the city would join middle income city category and the city administration is striving to ensure the stated plan and to make the city; rivalry, convenient for living and to become an exemplary city in good governance. Accordingly, the city Bureau of Finance and Economic Development (BoFED) is expected to play a key role in the realization of the overall strategic plan of the city. Hence, it supports the implementation of various civil service reform programs and prioritizes and allocates the limited resource of the city in line with the city government development policies and strategic plans. In addition, so as to sustain sectoral programs and be able to efficiently allocate limited resource to priority sector areas, it revised the budget preparation plan from one year to mid-term or three year plan. 34 Medium Term Expenditure Framework (MTEF) is one of the key budget instruments used, particularly in developing countries, in dealing with public expenditure management reform programs. It also helps to strengthen the link or accord between policies and strategies, development plan with program budget in the process of implementing strategic development plans. Due to this and other related important features of the tool, the city administration employ the tool since fiscal year 2008/09 to prepare its expenditure framework that covers three consecutive fiscal years and be implemented after the approval made by the city council. In the MTEF preparation process the city BoFED gather information from all sub-cities and relevant sector bureaus and it incorporate expert advice and comments given upon the draft document revision session (AAC -BoFED 2014). Article 52 of the city charter authorized the city administration to exercise the following fiscal powers: To assess and collect tax on income from employment within the city, excluding employees of Oromia Region, of the Federal Government and of Federal Public Enterprises; fix and collect urban land use fee and rent, and levy urban house tax within the city; assess and collect profit, excise and turnover taxes from individual businessmen trading in the city; receive value added tax (VAT) collected by the Federal Government from individual businessmen trading and public enterprise owned by the city; tax on income from rented houses and other properties; stamp duty on contracts and agreements as well as on title deeds registration executed in the city; fix and collect road user vehicles charge in the city; profit and excise and turnover taxes from public enterprises owned by itself; rentals from houses and other properties owned by itself; income tax, royalty and land rentals on small-scale mining operations undertaken within the city; fees on licenses issued and services delivered by itself; levy municipal taxes and duties as well as fix and collect service charges thereof; assess and collect income tax on gains from renting of patent rights within the city and capital gains tax on property situate in the city (proclamation No. 361/2003). The city revenue source comprises of own source direct and indirect tax, capital revenue, federal ministries support to their respective sector bureaus in the city, federal road fund, borrowing and external assistance. The city government has been collecting its revenue fully by its own revenue structure till the end of fiscal year 2010/11. However, its poor tax collection performance and the problem of double taxation force the city government to delegate the tax collection function to the Ethiopian Revenues and Customs Authority (ERCA). As a result tax and tax related revenue collection mandate has been given to ERCA as of July 2010/11 fiscal year, on the basis of the city government’s authority to delegate the powers & functions of the city revenue authority fully/partially to the appropriate federal government body (proclamation No.35/2012, Art. 13:1). 35 During the recent years, in particular fiscal years 2010/11 to 2012/13, the economic growth of the city has shown continued accelerated growth on average over 10% with the associated double digit inflation rate (i.e. maximum 34.0 in 2007/08 and minimum 11.2 % in 2012/13). The city’s gross product and service (GDP) estimated in 2008/09 fiscal year 18.7 billion birr has grown to 27.6 billion birr in 2012/13 fiscal year and is estimated to reach 30.5 billon birr in 2014/2015 fiscal year. Similarly the per capital income (PCI) has grow from 454 USD in 2009/10 fiscal year to 701 USD in 2012/13 fiscal year. In general out of the aggregate economic growth, service registered 80%, industrial 20% and agriculture register less than one percent (BoFED 2011/12, 2012/13, 2013/14). 36 CHAPTER THREE 3.1 Research Methods 3. RESEARCH METHODOLOGY The research mainly employed qualitative type of research to elicit practices, views and opinions of subjects or respondents to obtain an in-depth understanding of the problem on hand and the overall fiscal system and operation of Bole sub-city. Due to the qualitative nature of the data collected through interview and questionnaire, descriptive method is used to analyze the data on hand and quantitative method is also used to quantify the opinions obtained from questionnaire respondents and to analyze statistical data obtained from review of secondary sources. The detailed design of the research is outlined as follows. 3.2 Sampling As indicated in the preceding sub-section of chapter one, the objectives of this study is to examine and analyze the current practice as well as legal mandates of fiscal decentralization in Bole sub-city so as to address the identified problem area. Hence, to effectively address and thus be able to effectively respond research questions, it needs to conduct an opinion search and fact finding investigations to get experiences of relevant stakeholders (i.e. officials, expertise and officers) who are working at Bole sub-city and its subordinate tier woreda level sector offices and ERCA Bole Sub-city small tax payer’s branch office operating both at sub-city and woreda levels. For the purpose the above stated objectives, the researcher used purposive sampling technique to select and contact relevant questionnaire respondents from the stated sector offices and ERCA branch offices. In each of the 14 woreda administrations there are 22 sector offices operating and providing services to their respective constituents (i.e. most of the sector offices are not direct service providers they instead delivery support services). Of these sector offices the researcher purposely chooses five basic public service provider sector offices to see how they discharge their expenditure responsibilities to satisfy the needs and preferences of residents. Those vital service provides comprises of; health, education, cleaning management, housing development and trade and industry. 37 Moreover, all finance and economic development offices operating in each of the fourteen woredas are also included so as conduct an in depth investigation on the financial matters of each woredas and of course to get adequate information on how the operation of each sector offices financed and ultimately to see the clear picture of the current fiscal function of the sub-city. Among the fourteen woredas that function under the administration of the sub-city, five woredas were selected through the use of simple random sampling technique. Then, those basic service provider sector offices indicated above as samples that are operating within these five woredas were approached for the administration of the questionnaire. In addition to this, same five sector offices (i.e. health, education, cleaning management, housing development and trade and industry) operating at sub-city level that are responsible to coordinate their respective basic public service provider sector offices at woreda level were also participated in the administration of the questionnaire. 3.3 Data collection instruments So as to sufficiently examine and understand the actual practices and policy mandates of fiscal decentralization in Bole sub-city and be able to address the research questions outlined in this research, the study employed a combination of primary and secondary data sources. 3.3.1 Primary source A. Interview Open-ended and semi-structured interviews with relevant experts selected on the basis of their expertise on the subject under study and their current position to obtain first hand information from the following public institutions. 38 Table 1: Characteristics and composition of interviewees No. 1 2 3 Bureau and/or offices Addis Ababa city administration BoFED Bole sub-city office of finance and economic Development ERCA Bole sub-city small tax payers branch office Department/section Position number of interviewee Study, plan and budget core process coordinator 1 Study, plan and budget core process officer 2 Public finance transparency and accountability coordinator 1 Finance and economic development office finance office he a d 1 coordinator 1 coordinator 1 Human Resource management t eam Human Resource coordinator Officer 1 1 Plan execution follow up t eam Officer 1 Study, plan and budget core process Public finance administration main work process B. Questionnaire The questionnaire composed of close and open-ended questions were prepared and distributed in three diverse frameworks appropriate to sub-city level finance and sample service provider sector offices respondents, woreda level finance and sample (basic service provider) sector offices respondents and ERCA Bole sub-city small tax payers’ branch office sample woreda level office respondents. To sum up, employing such data triangulation technique enabled the researcher to see and cross cheek the divergent perspectives of officials, expertise and officers working at different tier of government namely city BoFED, Bole sub-city and woreda level office of finance and economic development offices and Sub-city, woreda level sample basic service provider sector offices and ERCA Bole sub-city and woreda level branch offices towards the practice and problems of 39 aspects of fiscal decentralization at Bole sub-city. As shown in tables 1 above and table 2 in the subsequent chapter, the total participants contacted and willing to engage in the interview were 10 in number and there were also 44 questionnaire respondents effectively participated in the administration of the questionnaire. 3.3.2 Secondary sources Secondary data were gathered from both published and unpublished data sources that include: books, journals, research papers and etc for the review of the current state of knowledge and concepts or literatures on aspects of fiscal decentralization. On the other hand, annul reports of BoFED and Bole sub-city office of Finance and Economic Development, ERCA data base, relevant data from MoFED and statistical reports from CSA website, relevant proclamations, regulations and directives were also used to examine the fiscal performance as well as fiscal policy mandates of the sub-city. 3.4 Data analysis As a qualitative research, Statistical Packages for Social Science (SPSS) and descriptive method were employed to analyze qualitative data obtained from interview and questionnaires and are presented in a narration form. The study mainly employed descriptive analysis in that it is mandatory to use data triangulation to analyze the data which was gathered mainly from various primary sources. The research is also supplemented with quantitative or statistical data obtained from primary and secondary sources and are presented in tables and chart followed by their associate descriptions. 40 CHAPTER FOUR 4. DATA ANALYSIS AND DISCUSSION 4.1 Overview and Legal background of Bole sub-city A. Bole sub-city overview According to the 2003 revised charter of Addis Ababa, a sub-city shall carry out municipal functions within the boundaries of the physical space located to it in accordance with the principles of decentralization and central leadership of the city. It shall also administer woredas (the former kebeles) that are found within its jurisdiction and is responsible to maintain and ensure law and order within its locality. Bole sub-city is one of the ten sub-cities re-established under the new reorganization of sub-cites in 2012 and covers an area of 122.08 m2 and consists of 14 woredas. According to Ethiopian CSA the population size of Bole sub-city in July 2016 is estimated to 378,104, out of which 201,549 are female and 176,555 are male. It is in fact the fourth populous sub-city in Addis Ababa next to Kolfe Keranio 524,729, Yeka 424,217 and Nefas Silk-Lafto 387,017 (CSA 2013). There are about 33 sector offices at sub-city level and 22 in each of the fourteen woredas, 4710 civil servants (937 at sub-city level, 1,665 at woreda level and the rest 2,108 belong to schools and health centers), and 2,408 police force within the scope of its administration. Public institutions administered under the sub-city include; high schools, colleges and health centers. There are also numerous government, non-government and private institutions found in the subcity including Bole International Airport, 26 Embassies, 57 hotels, 63 religious institutions and etc (Bole sub-city, June 2014). B. Legal background According to Article 32 of Addis Ababa City Charter (Proclamation 361/2003), the sub-city council being accountable to the sub-city residents and the city council shall; x x Endorse the sub-city’s socio-economic development as well as municipal service plans. Elect the speaker, deputy speaker and secretary of the council from council members of the sub-city 41 x x x x x x Elect the chief executive and deputy chief executive of the sub-city from council members appointed by the political party with the majority of seats. Endorse the appointment of the sub-city’s standing committee members nominated by the chief of the sub-city. Reallocate budget which has been allocated to it by the city council. Establish committee of the sub-city council. Receives from the chief executive of the sub-city and endorse annual and periodic reports. Issues directives by which the activities of the sub-city council would be led. Moreover sub-article 2 of the above stated article, grant the city council the right to dissolve the sub-city as well as wereda councils if their decisions found unlawful or against the interest and preference of residents. The city council shall dissolve a sub-city council where it believes that the decisions thereof are unlawful or jeopardize the interest of residents of the respective sub-city. It shall also specify the deadline for re-institution of the sub-city council and the conditions for meantime carrying out day-to-day executive functions. The same shall similarly be applicable as against a wereda council Similarly Article 34:1-2 & 37:1-2 of the same proclamation states that, the chief executive of the sub-city being accountable to the sub-city council and to the city Mayor will head the sub-city. The chief executive of the sub-city shall submit to the sub-city council the proposal of the subcity’s annual plan and budgetary allocation after consultation thereon by the sub-city standing committee and implement the same upon approval. On the other hand the sub-city manager, being accountable to the city manager and to the sub-city chief executive, shall be the municipal service executive of the sub-city. He/she in consultation with the city manager, propose to the sub-city chief executive of the sub-city the utilization of municipal service organs and service delivery alternatives existing at the sub-city level and implement same upon approval. The sub-city’s economic sectors are categorized as; revenue and finance, micro finance institutions, agriculture, service providers and financial institutions, trade, industry and investment. The sub-city’s office of finance and economic development is sub-divided into; 1) study, plan and budget core process 2) public finance administration core process 3) public procurement/purchase and property administration core process. 42 Table 2: Composition and characteristics of questionnaire respondents Item Characteristics 1 Sex 2 Age 3 Education level 4 Sector office level 5 service years 6 Current position status Female Male Total under 28 years From 28 to 35 years from 36 to 45 years Over 45 years Total MA/Msc BA/Bsc Diploma Total Sub-city level Woreda level Total Under 1 year 1 to 3 years 3 to 5 years Above 5 years Total Head/coordinator Officer Total number 18 26 44 19 13 8 4 44 5 36 3 44 5 39 44 3 12 16 13 44 33 11 44 Source: extracted from primary data collected (Questionnaire 2016) % 40.90 59.09 100 43.18 29.54 18.18 9.10 100 11.36 81.82 6.81 99.99 11.36 88.64 100 6.82 27.27 36.36 29.55 100 75.00 25.00 100.00 A. Composition and characteristics of respondents To effectively address the research question of the study, the researcher used a variety of different sources to be able to access the right sample questionnaire respondents to gather diversified and adequate first hand information. Table 2 above shows respondents’ background information in terms their; sex, age classification, education level, associate sector office, service years and their current position. Hence, 59.09% of the respondents were male and the rest 40.90% were female. With regard to their age distributions 43.18% were under 28 and 29.54% were between 28 and 35 while 18.18% and 9.10% were between 36 and 45 and over 45 years respectively. In terms of their education level 81.82% were BA degree holders followed by 11.36% MA and 6.81% Diploma holders. Regarding participants sector office 88.64% were from 43 worda sector office and the rest11.36% belong to sub-city level sector offices. With respect to service years, 29.55 were above five, 36.36% were between 3 and 5 years of service years and the rest were below three years and among the overall respondents 75% were sector office coordinators and the rest 25% were officers. 4.2 The current state of fiscal decentralization in Bole sub-city Decentralization of fiscal power, as discussed in detail in the literature part of this research, to sub-national governments fundamentally encompasses the devolution of taxing or revenue raising power, spending/budgeting autonomy and borrowing powers. In the subsequent subsections the actual practices of Bole sub-city’s expenditure responsibilities, revenue raising power, intergovernmental transfers and borrowing power are briefly discussed. 4.2.1 Expenditure Responsibilities According to the 2003 revised charter, the city administration has devolved public service delivery functions, since 2003, to sub-city and woreda tiers in line with the principles of decentralization. Similarly, according to the stated charter, the city administration shall provide block grant to sub-cities so as to discharge and finance sub-city and woreda level sector offices and other devolved expenditure responsibilities. 4.2.1.1 The Budget process The budget process in public institutions deals with the efficient allocation of scarce public financial resources and the need to effectively work out to reconcile the tradeoff between limited available resource and a range of societal/public needs and preferences. It should also maintain the fiscal or budget discipline and long term fiscal sustainability by making or keeping actual spending within the available resource without reducing services and increase in taxation. According to Article 14 of the 2003 revised charter of Addis Ababa city, with respect to the fiscal matters, the city council has given the mandate to approve the total annual budget of the city that comprises of City level sector bureaus, agencies and other public institutions operating under the administration of the city, all the ten sub-cities and their subordinate116 woredas budget. Budget assignment to sub-cities made on the bases of the budget allocation formula prepared by the city BoFED. 44 4.2.1.2 Pre-budget preparation considerations A. Budget ceiling The formulation of budget ceilings depends on the city overall estimated revenue within a budget year and it indicates the maximum financing limit of the city administration to carry out its expenditure responsibilities within the same fiscal year. “The budget for each fiscal year which comprises the city government revenue, expenditure and subsidy which get from the federal government as well as the budget which shows the expenditure coverage shall be approved by the city government council” ( Proclamation No. 16/2009, Article 18). On the basis of the city total annual revenue collection estimate, the head of Bureau of Finance and Economic Development (BoFED) thus determines the maximum expenditure amount in which each sector offices’ expenditure budget request is to be based (proclamation 16/2009, Article 21). The subcity head of Finance and economic development office in turn determine and disclose budget ceiling of each budgetary sub-city and wereda sector offices operating under its jurisdiction in line with the ceiling fixed to the sub-city and direction set by the cabinet of the sub-city. B. The budget calling The budget process in Bole sub-city, similar to other public budgetary institutions and city administration, follows the federal government budget request guidelines. The sub-city receive budget calling from the city administration BoFED and prepare its annual budget in line with the budget guidelines and budget ceilings provided to it. Hence, the sub-city shall prioritize the type and quantity of service provision areas upon preparing its’ annual budget plan, to match overall sub-city expenditure responsibilities with the limited financial resource assigned to it by the city administration. The string attached to the budget guideline strictly indicates that the budget request to each sector offices should not exceed the associated budget ceilings. City as well as sub-city fiscal plans and priorities are made on the bases of Medium Term (three years) Expenditure Framework (MTEF) which is prepared by the city BoFED and approved by the city council. The expenditure framework mainly takes into account the strategic pillars of Growth and Transformation Plan (GTP) of the city and Millennium Development goals (MDG) -now renamed as Sustainable Development Goal (SDG). 45 In general, each wereda sector offices prepare and submit (within the time frame given upon budget calling) their annual budget plan to their respective wereda finance and economic development office and the office in turn send the overall/aggregate wereda annual budget plan to the sub-city’s finance and economic development office. The sub-city office of finance and economic development on its part review the appropriateness of the budgets it received from each woredas and after consolidate it with corresponding sector offices’ budget found at sub-city level and get the approval of the sub-city council, it send it to the city BoFED for further approval. The city BoFED again, after verifying the appropriateness and correctness of the budget plan it received from all sub-cities, submit the consolidated (sub-cities and city level bureaus and other public institution offices and agencies) annual budget plan to the city council for final approval. Budget requests from each bureau, agencies, sub-cities, woredas and sector offices are expected to be submitted to the city BoFED till 2nd of June or May 25th E.C. For those who fail to submit within the deadline, the city BoFED will determine the budget itself and submit it to the city council for decision and/or approval. C. Budget transferring mandates Once the budget has been approved by the city council and apportioned to sub-cities, sub-city office of finance and economic development is not allowed to transfer from capital budget to the recurrent. But they can transfer from recurrent budget to the capital budget. However, the city BoFED head may transfer a recurrent budget from one public body to the other if it is ascertained that the public body to which the budget is appropriated can’t wholly utilize its budget. Not only that, according to Article 25:1 of proclamation 16/2009, it may also authorize the transfer of funds from the capital budget of one public body to the capital budget of another public body when; x A deficiency in one public body’s capital budget can be met by an offsetting transfer from another public body’s capital budget approved for that fiscal year provided that the x capital budget received additional funds is a previously approved capital budget. A budget is requested to finance pending obligations of a project approved in previous years for which no budget is allocated in the current fiscal year. 46 With regarding to budget transfers between city and sub-city, as per the request of head of sector offices, the BoFED bureau head may transfer budget from city to sub-city. Similarly the head of the sub-city office of finance and economic development may transfer budget from the sub-city to city upon the request of head of sub-city sector offices. D. Budget deficit financing Whenever a need arises for supplementary budget or when a budget deficit occur, “the chief executive of the sub-city may transfer, notifying the sub-city cabinet, from the emergency expenditure of the contingency budget an amount proper for the requested expenditure” (proclamation No. 16/2009, Article 28:4). At sub-city level, when the amount of additional budget request exceeds the reserve, the sub-city office of finance and economic development head can forward the request to the city BoFED for additional fund reimbursement. The city BoFED, after reviewing the appropriateness of the request and verifying the availability of enough funds in their treasury, it may allow the transfer to the sub-city. So far Bole sub-city never experience budget deficit beyond the reserved ‘emergency expenditure or budget’ amount. Likewise, according to city BoFED expertise, there is no single sub-city ever requested additional budget or face budget deficit. This is partly due to the effective enforcement of the directive, what they called, ‘expenditure NORM’ attached to the budget calling to limit monthly expenses of telephone, internet, vehicles fuel, food, medical and wereda and sub-city higher official’s reception allowance to a certain fixed amount (ceiling). Fortunately the ‘NORM’ has contributed a lot in controlling and limiting the highly volatile or elastic operating expense categories within the allocated budget and be able to maintain budget discipline. However, in most cases budget disciplines are maintained at the expense of effective public service provisions, where some public services are cut to main the available budget or delivered in poor quality and in some cases the allocated budget may underutilize. 4.2.1.3 Budgeting autonomy and its impact on public service provision A. Sub-city and woreda annual budget setting autonomy Budget formulation autonomy encompasses sub-city and woreda level sector offices’ discretionary power to make decision without any higher level government interference on their 47 budget requirements, in the process of discharging their expenditure responsibilities. The practice of the sub-city’s overall budget setting autonomy and how they determine the quantity as well as quality of service provisions to satisfy the needs and preferences of each woreda residents is presented as follows. A-1 Budget formulation criteria As discussed earlier, sub-city and woreda level sector offices shall prepare their respective annual budget plan up on budget calling on the bases of the budget guide line provided to them. In administration the questionnaire respondents were asked “what criteria do your sector office follow to formulate your annual budget”. Their response reveal that in some woredas, budget incremental (15% incremental in each sector offices’ previous year budget) is used as a means to determine their next fiscal year budget and in others and in all of the sub-city level sector offices, forecasted demand for salary and other operating expenditure requirement are major elements considered in formulating their annual budget. Sub-city office of finance and economic development officials were also asked similar questions or what criteria does their office follow to assign woreda and sub-city level sector offices’ annual budget. Among other criteria elements, each sector office’s past nine months budget utilization performance takes the lion share in determining each sector office’s (including woreda level sector offices) next fiscal year annual budget. However budget assignment to health, education, police and solid waste sector offices is based on the forecasted quantity of service expected to be provided (i.e. Health-number of forecasted patients, schools-number of students, police department -number of police force, and solid waste -amount of solid waste to be collected and removed). A-2 sub-city, woreda and sector offices autonomy to determine their level and quality of service provision Respondents from sample sub-city level sector offices and woreda level sector offices including all finance offices were asked to reply for the inquiry “Are you free to determine the quantity as well as the quality of you respective office’s service delivery without any higher level official or government intervention or pressure?” followed by “specify your reason” and the detail of their reply is presented as follows. 48 Table 3: Sub-city as well as woreda level sector offices respondents’ response on their freedom to determine the quantity as well as the quality of their respective office public service provisions Category of respondents Are you Free to Sub-city level woreda level Wored level determine the s e c t o r o f f i c e s s e c t o r o f f i c e s f i nance offices quantity of your offices’ public Numbe Numbe % % Number % services provision r r Yes 2 10.00 1 7.14 To some extent 4 20.00 No 5 100 14 70.00 13 92.86 Don't know Total 5 100 20 100 14 100 Source: extracted from primary data collected (Questionnaire 2016) Total response Numbe r 3 4 32 % 7.69 10.26 82.05 39 100 As shows on table 3 above, 10.26 % of the respondents reply that to some extent they are free to determine quantity of their service in that at least they are free to decide how to spend it to the extent of the budget allocated to them. On the other hand 82.05% of the respondents reveal that they don’t have real discretionary power to decide the quantity and quality of their respective offices’ service provision and they further illustrates their argument in a manner that, even though the budget formulation procedure seems free to express intent of budget requirements, operating expenditures other than salaries are determined by sub-city office of finance and economic development officials and what they actually received is much less than what they expect or disclosed in their budget request proposals. Consequently, to them, since the final allocated budget is from the outset assigned by city BoFED to the sub-city and the sub-city in turn determined woredas and sector offices’ budget on the bases of the available fund but not the sector offices’ actual demand, budget calling is simply to fulfill the formality and has no significance in particular in determining their annual fiscal plan or demand. In this respect both sub-city and woreda level sector offices’ officers’ budget setting power is so insignificant. In addition budget ceiling provided up on budget calling to each sector offices indirectly limits their budget setting autonomy and are oblige to strictly stick to the extent of the available fund rather than decide by their own on what they actual demand to satisfy the needs of their clients or residents. Not only that, at the extreme scenario, in some weredas the chief 49 executive re-assign the allocated wereda budget as per his own interest (subjectively) to each sector offices and as a result some sector offices lack enough fund even to run their offices. On the other hand, from the sub-city office of finance and economic development officers and officials point of view, sub-city and wereda level sector offices’ budgeting autonomy claim is partially correct and the main reason for such budget ceiling provision and operating budget readjustments on submitted budget proposals is basically due to limited availability of fund transferred from the city BoFED. In addition some sector offices exaggerated or unjustified budgets are too often reduced to a certain amount to keep the budget ceiling and/or discipline provided to the sub-city. The very common unconvincing budge request in almost all woreda and sector offices is the so called “training” related expenditures (i.e. comprises of training facilities expense, transport and participant allowance and etc). This issue has of course repeatedly revealed as a big problem by woreda level finance officer respondents too. Requesting funds for exaggerated number of participants and provision of trainings other than the intended objectives of sector offices opens a room for corruption and are the day to day challenges of wereda level finance officers. Likewise the woreda sector offices’ officers claim, sub-city officers also boldly ascertain that lack of proper fiscal planning and budget formulation autonomy are critical problems of sub-city and woreda level sector offices. The city BoFED officers and expertise on their part reinforce what has been said by the sub-city officers and to them providing “Budget ceiling” to each sub-city and/or sector offices is the only way to ensure the overall annual budget demand of the sub-city or the city at large within the available fund. Hence the intention is not to limit the autonomy or the budget setting power of sub-city, wereda and sector offices officials’ financial decision making power rather to ensure fair redistribution and equitable utilization of public money across the city. In practice, according to city BoFED expertise, central budget bureau or city BoFED experiences submission of inflated number of service users so as to get better budget assignments. For instance, number of students provided by some sub-cities has considerable variations with that of city education bureau data. Similar variations are also seen in the rest of the sectors. In fact such kind of statistical variations exhibited in some countries where ‘formula approach’ or intergovernmental revenue sharing is used as the main revenue source of sub-national governments (Bahl 2008). Input Information biasness is one of the drawbacks scholars indicate 50 in their arguments against the inappropriateness of employing formula approach in particular where the objective is to enhance growth and development at local or sub-national level. B. Public service delivery determination B-1 Budget ceiling and its impact on service provision Respondents and interviewee from woreda level finance offices and sub-city and woreda level other sector offices were asked about the “impact of budget ceiling and 100% budget dependence on service provision”. According to them, budget ceiling is the key determinant of each sector office’s quantity as well as quality of public service provision. They usually try to provide services valued to the extent of the allocated budget but this doesn’t mean they have access to adequate fund and are satisfying the ever increasing needs and preferences of their clients or constituents. Nonetheless, according to them, if public service delivery has to improve to the required level genuine budgeting and fiscal planning should start from quantity of societal needs rather than simply assigning (throwing -literal word used by respondents) certain amount of fund every fiscal year and spend it without proper planning. Besides professionals should have to be given the opportunity and the autonomy to exercise their right to genuinely (i.e. not for formality) formulate their offices’ budget without significant higher officials interference. Respondents strictly urged that with the current culture they are simply doers of what is passed from their superiors and are not allowed to think, to actively engage in planning, decision making and so forth. This in turn, in addition to unattractive pay and unpleasant working environment highly de-motivate them and lead them either to opt to quit or being passive worker. The researcher believes that allocation of adequate budget doesn’t guarantee and is not the only determinant of effective and efficient public service provisions. There are other equally important issues that need to be adequately addressed. According to questionnaire respondents and interviewees response there are number of employment and working environment related factors that need the attention of officials and to be resolved, if they are really keen to build motivated and proactive public servants. To mention some of the most familiar problems experienced and raised by the participants are summarized as follows. Finance officers unattractive salary relative to the work burden and responsibility results higher turnover, un 51 pleasant and very compact working environment, poor employment benefit scheme, lack of equal treatment and respect, lack of professionalism and dominance of patronage, promotion in favor of political believe rather than actual execution capacity, lack of administrative freedom to make decisions, political appointees extreme interference in administrative matters and etc. In addition lack of need based assessment purchases and inability to acquire sufficient office equipments (i.e. computers, printers, site cleaning hand tools and other equipments) necessary to efficiently run their office has considerably contributed to their discouragement. B-2 100% budget dependence and its impact on quantity as well as quality of service provision (budget approved by city council) According to scholars like Bahl & Martinez 2006, lower level governments absolute budget dependence on higher level government have the danger being spending agents of the center and some strings attached to it may inhibit them from freely deciding where and how to spend it and effectively addressing their localities priority needs and preferences. Likewise, respondents from the sub-city and woreda level sector offices disclose that the 100% budget dependence on city administration or the amount of fund available indirectly dictates the quantity as well as the quality of public service provisions within the sub-city. Hence, each sector offices determine their annual service provision plan after they received their assigned budget from the sub-city and their respective woreda finance office. Most often the mismatch (budget scarcity) between what each sector offices plan and what they actual received significantly limits service provision and very difficult to function according to fiscal plan and be able to satisfy the needs and requirements of residents. Continuous trend of such mismatch between demand and supply of finance discourages personnel and some sector office staffs become inactive and feel like neglected sector employees. Besides to the limited budget provided, inability to efficiently and effectively utilize the allocated budget is also another chronic problem of woredas and sector offices face in their day to day operation. However, for controlling purpose they still appreciate the 100% financing of their expenditure requirements from city administration. Among others one noticeable justification they mention here is that funds raised by schools for development activities. Funds raised for the said projects don’t seen properly utilized for the intended objective and often times performance reports accompanied with overstated project costs. 52 Sub-city office of finance officers and officials on the other hand argue that, even though the amount of fund allocated determines and limits the level of service provision, to the extent of their knowledge the claimed finance scarcity is not as such a big problem of the sub-city. According to them, the said “budget scarcity” most often occurred due to sector offices, including woreda level finance offices and other sector offices, inappropriate planning, inability to efficiently assign and utilize the allocate budget (probably lack of discretionary decision making power), limited execution capacity and lack of leadership commitment to genuinely serve the society. As a matter of fact sub-city absolute budget dependence on AACA, as said by the respondents, directly or indirectly shapes and limits the overall sub-city service provision and in particular make it difficult to make sector level long term plans and function accordingly. Sector offices both at sub-city and woreda level enforced every year to revise their proposed plan, disclosed during budget calling, so as to match their expenditure with the available assigned budget. In general, lack of appointed officials’ (non civil servant) technical knowhow on how to run offices and the customary instruction “just do what I said” has exacerbated the problem even worse. Hence, limiting the amount of budget to a certain amount, final budget determination decision by sub-city office of finance and economic development officers and lack of empowering genuine budget setting power to sector offices on one hand and woreda level higher officials unnecessary interference and pressure and other capacity related problems on the other hand, severely damage the moral and motivation of officers and personnel. As a result they lack the interest to properly and objectively fill the budget calling proposal and their perception towards budget calling is nothing more than fulfilling the formality and is simply a waste of time and public resource. C. Impact of financing Woreda level ruling party offices function/operation According to the interviewees and questionnaire respondents’ response, the functions of all woreda level ruling party offices’ expenditures (salaries and other recurrent expenses) are fully covered by the budget allocated to each woreda budget. Technically, this expenditure doesn’t have designated expenditure title and doesn’t appear in the financial accounts because it is not among the 22 sector offices. It is rather financed from the woreda chief executives’ salary and 53 other operating expenditure allocated budget. That is why the chief executives’ budget is relatively exaggerated. The respondents further boldly ascertain that even though they are aware that the ruling party office expenses should be financed by the party itself or membership fees collected from part y members; none of them or no one so far raise this issue in front of their boss and explicitly refuse to do so. The reason is fear of job insecurity. Usually officers or civil servants that engage in such kind of activities are considered as members of other political (opposition) parties and are discriminated from promotion and other employment benefits and in the extreme scenario they may lose their job. Thus due to the fear and other related problems, in most cases, officers simply perform whatever instruction or decision passed from their superiors/boss without asking the legal basis or appropriateness of the task. As a result, service provider sector offices in aggregate lose substantial amount of their allocated budget which might help them delivery public services in a better quantity and quality within their respective woredas. Moreover, there is no demarcation between government and party mandates and in particular in utilizing public resources and property. In most cases priority is given to party functions than public services provisions and even during election campaigns some sector offices budgets withheld and transferred to the party operations. All woreda level party offices are located either in the same building of the woreda or within its compound. Hence in one way or another, respondents claimed that their service provision has been negatively affected by the ruling party illegal utilization of their assigned budget. They seek a more transparent public finance administration and utilization system to efficiently utilize the scarce public resource to the intended purpose. Similarly, transparency should be beyond posting every sector office plan or allocated annual budget on posters and notice boards. Even though this is an appreciable progress, it lacks clear and transparent year-end reports accompanied with genuine performance reports to check whether the said allocated budgets are used according to the plan or to the intended purpose. To sum up, the Sub-City’s budgeting autonomy and/or quantity as well as quality of public service determination is constrained by the available fund that is allocated by city BoFED and budget ceiling imposed by the same institution. On the other hand, if the sub-city continues with 54 the long standing poor service delivery tradition and is not responding accordingly, tax payers might be discouraged and could engage in tax evasion and will lose trust in the overall government administration. Taliercio (2005), in his article underlines the importance as well as the extent of sub-national government service delivery in the following manner. “Ideally, and according to theory, subnational governments provide service to their constituents up to the point at which the cost -in terms of taxes- equals the benefit, in terms of the value of the service”. Thus, to realize the stated optimal public service delivery, Bole sub-city must have devolved significant budget setting autonomy so as to pursue the right to decide the quantity as well as the quality of public service provisions. 4.2.1.4 Budget allocation to Bole Sub-city The city administration allocate annual budget to fiancé the sub-city’s expenditure responsibilities on the bases of the formula discussed earlier. The table below (Table 4) presents the recurrent and capital budget assignment made during the past ten years. Table 4, Bole Sub-City recurrent and capital budget assignment in Birr 2006/07 - 2013/14 Fiscal year No. Total budget assignment Recurrent 100,110,503.80 Total Annual growth % 1 2005/06 2 2006/07 82,840,376.66 55,100,163.84 137,940,540.50 -21.31 3 2007/08 87,798,935.48 99,119,479.52 186,918,415.00 35.50 4 2008/09 102,273,934.88 95,295,000.00 5 2009/10 113,525,921.66 95,737,337.51 209,263,259.17 5.91 6 2010/11 165,146,608.94 165,115,102.42 330,261,711.36 58.00 7 2011/12 229,647,421.82 217,422,581.60 447,070,003.42 35.37 8 2012/13 300,041,360.63 314,235,322.83 614,276,683.46 37.40 9 2013/14 384,267,724.48 401,863,541.67 786,131,266.15 27.98 10 2014/15 588,853,164.51 355,449,816.54 944,302,981.05 20.12 Total 67,231,632.20 Capital 2,121,627,081.26 1,899,448,849.73 167,342,136.00 197,568,934.88 5.69 4,021,075,930.99 55 Source: Finance and Economic Development- study, plan & budget 2011/12 and 2013/14 annual report, Bole Sub-City office, Addis Ababa. During the fiscal years (period) 2005/06 to 2014/15 the city administration has allocated a total budget of 4,021,075,930.99 birr to the sub-city, out of which 2,121,627,081.26 (52.76%) were for recurrent and the remaining 1,899,448,849.73 (47.24%) for capital expenditure. The budget allocated in 2013/14 fiscal year has grown by 464.3% from that of 2005/06 fiscal year. Similarly, the average total budget allocation growth within these ten fiscal years is 22.74 per cent per year. However, the sub-city’s actual budget utilization with respect to the allocated budget, in particular, the capital budget is said to be weak. The Sub-City within the same duration had received allocated recurrent budget of 2,121,627,081.26 Birr out of which 1,938,815,886.90 was utilized -that is 91.38% of the allotted budget. With regard to the capital budget (as depicted in the chart 1 below) out of the 1,899,448,849.73 birr budget only 1,220,533,502.39 birr was utilized. The actual capital budget utilized was about 64.26% and during the past ten years on average 68 million birr unspent fund was returned back to the city BoFED treasury every year as per the financial administration law of the city. “… the unspent balance of appropriation granted for a fiscal year shall laps and shall be credited to the treasury account of the Bureau” (Proclamation No. 16/2009). 56 Chart 1 Bole sub-city allocated and actual capital expenditure performance in birr from fiscal year 2006/07 to 2013/14 450,000,000.00 400,000,000.00 350,000,000.00 300,000,000.00 Planned Capital budget Actual capital used unused budget 250,000,000.00 200,000,000.00 150,000,000.00 100,000,000.00 50,000,000.00 0.00 Source: Extracted from Bole sub-city office of Finance and Economic Development; study, plan & budget main process 2011/12 and 2013/14 annual reports and IBEX data base. It is perhaps imperative to inquiry why such amount of money left unused since the sub-city had a lot to do with it and obviously a number of infrastructural as well as development activities are still highly in demand. Apparently, according to interview respondents, all the stokeholds that engage in the capital project implementation function are liable or accountable for the inefficient performance and will share the responsibility accordingly. Those stakeholders include Bole subcity office of Finance and Economic and Development, construction contractors, housing and construction consultant at Bole sub-city, A.A city housing development agency, A.A. City land development and management Bureau and etc. In addition to this, according to sub-city officers and expertise believe and opinion, the budget needed for the construction of capital projects is 57 allocated before the sub-city actually acquire land, obtain title deeds and finalize all the necessary pre-conditions to begin the capital construction projects. Surprisingly, the highly bureaucratic land acquisition task is not as such easy even to government institutions and requires the approval of city administration Land Development and Management Bureau so as to make available a plot of land to the sub-city. Most often in the middle of the process the fiscal year lapsed and the budget allocated returned back to the city BoFED treasury. Above all coordination failure is the major challenge observed in executing projects in time and to the acceptable quality. Obviously as projects delay cost of construction will considerably increased beyond the original budget and confrontation arise between the project owner and other stakeholders-in particular the contractor. On the other hand from the city BoFED point of view, the capital budget allocation made in such a way that sub-cities can acquire and fulfill the preconditions as the projects are undertaken within the geographic area administered under their authority. In addition - according to the experts’ (of the city BoFED) beliefs, who were interviewed- project executive and execution capacity is a chronic problem of not only Bole subcity but also all sub-cities of the city administration. Projects that were expected to be executed, for instance, within two years may take four or five years. To further illustrate the poor capital budget performance of sub-cities in the city administration, during the budget year 2011/12 the city government assigned total capital budget of 3,887,839,415.88 birr to all the ten sub-cities. At the end of the fiscal year 1,311,189,650.92 birr which is 33.73% of the budge were found unspent and reverted back to the city treasury (BoFED, 2012). Similarly in 2013/14 fiscal year, out of the total capital budget of 5,493,581,070.83 birr assigned to all sub-cities 1,318,264,576.02 birr or 24% of the assigned budget were unspent fund (BoFED, July 2014). Hence, the inappropriate timing of capital budget release by city BoFED without consulting Subcity’s concerned officials and without considering sub-city’s actual pre-project preparation circumstances on one hand and stakeholders coordination failure on the other hand are said to be the major impediments of realizing infrastructural and other development activities in addition to implementers lack of commitment and human resource capacity related problems. This in turn significantly reduced sense of ownership in administering capital projects. 58 In theory devolved budgetary autonomy mainly relay on the amount of local spending power left to a particular sub-national government. Conventionally the amount of devolved autonomy measured through the ratio of local own revenue to that of total local expenditure. The practice as well as related laws (the city 2003 revised charter) indicates that, the budget requirements of Bole sub-city is fully covered through intergovernmental transfer made by the city government. As a result the sub-city’s discretionary power to determine the level as well as the quality of public service delivery is insignificant and is very restricted. Budget ceiling provided by the city BoFED for each sector offices of the sub-city and weredas during the budget preparation phase is one of the major constraint the sub-city faces. However, expertise at the city BoFED argues that, the sub-city is provided with block grant transfer (revenue share) and is free to determine to its local priorities. But the budget assignment made to each sector offices in the sub-city are restricted by budget ceiling provided in advance and can’t increase the level and quality of public service delivery beyond the determination of city administration. On the other hand, though the city BoFED experts believe and underline that the budget allocate to the sub-city is block grant, in practice some sector offices’ budgets are actually specific not block grants. The purpose of these specific grants is to realize the strategic plan and development priorities of the city government. Those sector offices categorized under specific budgets include; education, health, micro and small scale enterprises, youth and sport and etc. This is to mean, the allocated budget amount determines the level and quality of public service delivery within the sub-city boundary and adjustment of public service delivery quantity and quality above the assigned spending levels is impossible. Their limit is not something related to their taxable potential or weak own source revenue collection effort, rather it is the budget ceiling, and they can’t jump beyond that ceiling! Scholars also strongly criticize and express their fear on the danger of an absolute revenue dependency on higher level government intergovernmental transfer/grant for their expenditure requirements (Bahl & Martinez 2006). Not only that, since the revenue of the sub-city is determined by the city administration finance office or BoFED, sub-city and woreda level officials and officers might not be accountable for the failure to deliver adequate quantity as well as quality of public services as they would in the case of sub-city’s own-source revenue (Bahl 2000). 59 4.2.2 Revenue assignment According to Article 14 of the 2003 revised charter of Addis Ababa city administration, with respect to the fiscal matters, the city council has the power or the authority to levy tax and duties as well as set service charges and fees on revue sources upon financial matters falling under the power of the city government. Similarly Article 57:1 of the same charter stress that, the revenue sharing to sub-cities is on the bases of a formula with the objective to enhance competitiveness and effectiveness as well as rests on equality among sub-cities. According to the city BoFED officers the very purpose of revenue sharing via formula upon the formulation of the city charter was due to the existence of wider disparity in taxable potential and weak tax collection capacity among sub-cities. On the other hand, Article 57 of the charter indicates the condition for sub-cities revenue collection and direct utilization as, “such revenue of the city government as are to be collected and directly utilized by sub-cities shall be specified by the city council”. However, the council still didn’t specify or designate the said revenues that are to be collected and directly utilized by sub-cities. In fact education & health centers are privileged to use the revenue they collected (registration fees) directly to their expenditure responsibilities. But the revenue collected from these institutions is insignificant and could not even cover their full respective budget or expenditure needs. Since all the revenue sources of the city are in the hands of the city administration, Bole sub-city doesn’t have the right to introduce or to abolish a tax, to set tax rates, to define the tax base, or to grant tax allowances or reliefs to individuals and firms, which are the common but vital features of devolved revenue generation or taxing power of sub-national governments. This is to mean the sub-city is not eligible to generate its own revenue from its own jurisdictions and is absolutely dependent on city government revenue transfer so as to discharge its expenditure responsibilities. 4.2.2.1 Level of revenue autonomy In principle the level of sub-national governments, like Bole sub-city, discretionary power in deciding the level of revenue to be raised and its direct utilization (the freedom to decide where and how to spend) can be evaluated on the bases of standardized parameters categorized under; 60 (a) absolute autonomy - the power to assess and levy tax base and rates, (b) limited autonomy the power to set either tax rates or tax bases but not both and tax sharing, and (c) no local autonomy - no devolved power at all (OECD- KIPF 2013 and Taliercio 2005). In the eyes of the above local autonomy parameters, Bole sub-city falls under the category of no devolved power or local autonomy at all in deciding the tax bases, rates, tax sharing and the level of revenue to be raised within its jurisdiction and its direct utilization. In this respect questionnaire respondents and interviewees were asked; “what if the sub-city allowed to utilizing the revenue generated within its boundary, does the revenue collection, quantity as well as the quality of public service delivery improved?” All the interviewee and 95% of the respondents believe that revenue collection would increase substantially and accordingly public service delivery will eventually improved if genuine devolution of power appropriately implemented. However, they have two key reservations, on one hand if sub-cities allowed to utilize the revenue generated from their respective administrative boundary, richer sub-cities may better benefited and getting richer while those sub-cities having poor taxable potential can lose substantial amount fund and gets poorer and poorer and creates inequitable growth and development among sub-cities, which is not desirable. This stand is not only the view of woreda level officers but also boldly underlined by city BoFED experts and sub-city finance and economic development officers and officials. According to the city BoFED experts, if revenue raising and direct utilization devolved to subcities the city administration will face short of fund and fail to finance city level bureaus, agencies and other institutions’ expenditure responsibilities. To them, the idea of devolving revenue raising power and direct utilization authority to the sub-city (though they appreciate the idea) will not be feasible at this present. On the other hand their fear lies on malfunction and/or corruption; immediate devolution of revenue or own source utilization power can further exacerbate corruption and worsen devastation of scarce public money. To them, unless the overall existing public finance administrative (i.e. weak auditing and controlling system, poor planning, unprofessional and subjective assignment of budgets to sector offices and etc) system and officials attitude towards the use of public money changes, they absolutely prefer to continue with the current 61 intergovernmental transfer (formula based revenue sharing) rather than devolving revenue power to the sub-city. From the sub-city finance office officials and officers point of view, they definitively reveal similar attitudes and fears with that of worreda respondents. However city BoFED experts have slightly different perspectives. To them capacity related problems is the dominant factor in administering and collect revenues in the sub-city. The researcher understands city BoFED expertise, sub-city, woreda as well as sector offices officials and officers’ fear and associated risks in devolving revenue utilization power to the subcity and really appreciates their concern on taxable disparities and its consequences on other subcities. Nonetheless devolution of revenue utilization power to lower levels of government has Varity of forms or models. As Bahl (2008), pointed out the basic revenue sharing models are; derivations, formula, cost reimbursement and ad hoc sharing approaches. Among of these four models formula approach is currently applied in the revenue sharing system of AACA. Allowing own revenue utilization power to lower levels of government like in our case Bole sub-city doesn’t necessarily mean all the revenue generated with the boundary of Bole sub-city will totally utilized by the sub-city. It could be worthwhile to highlight some possible alternatives revenue sharing approaches which will help to choose the one that is feasible with the current reality of the sub-city and the city administration’s financial system and capacity. Option one - Tax assignment: In this complete revenue decentralization or extremely independent local own-source revenue arrangement system, Bole sub-city will have designated tax and non-tax own revenue sources. The sub-city is thus legally authorized to identify tax bases, set tax rates and raises revenue from those designated revenue sources and be able to directly utilize the revenue generated within its administrative boundary without any higher level government authorization or approval. This in turn enhances complete decision making power of sub-city officials. Option two – Tax sharing Tax sharing enhances the rational distribution of revenue between sub-cities -where people are working in one sub-city (generating income) and residing in another - and ensure all inclusive 62 development and reduce horizontal fragmentation that may cause due to inequitable distribution of taxable potential across sub-cities and weredas. As a model (the percentage used here are arbitrary, just for illustration purpose), employment income tax collected in Bole sub-city might be treated in the following manner; if the worker is residing other than Bole sub-city, his/her 50% of income tax goes to Bole sub-city, 30% to the sub-city where he/she reside and the rest 20% to the city administration. But if a worker resides in the same sub-city where he/she is working, 80% of his income tax goes to the same sub-city and 20% to city administration. All other revenue sources can be treated in a similar manner with their associate distinct percentage values. (i.e. this system can be applied in the same way at wereda level when revenue raising power is further devolved to them). Nonetheless, this system (tax sharing) seems too complex to the current revenue administration system and capacity of the city administration and it might be counterproductive. Put it another way, it is unlikely to be applicable in the near future, but is not impossible in the long run. If appropriately design and implemented, it will have irreplaceable role in creating a public sector that can go along with the growth and development of the private sector. Option three - Revenue sharing through derivative approach Unlike revenue sharing through formula, the amount of revenue shared to Bole sub-city through derivative approach is based on the amount of actual revenue collection made within the subcity’s boundary. It stimulates and increases the tax collection effort and significantly improves and/or maximizes the amount of sub-city’s annual revenue. With regard to tax collection and administration and of course to avoid the burden of local administrative capacity, since the current revenue collection capacity and performance of ERCA is much better than the sub-city, it is efficient and advantageous, at least in the short run, if ERCA continues with its current collection mandates and similarly the sub-city continue its municipal related revenues collection responsibilities. In some cases derivative revenue sharing arrangement can be supplemented with some form of unconditional grants to fill vertical gaps and/or wider horizontal disparities exist among sub-cites where their economic potential or taxable capacity is relatively low and inadequate to cover minimum level of public service delivery requirements. Derivative approach can also serve as a 63 transition or a move towards sub-city complete taxing power or devolution of own source revenue generation power The first option grants the sub-city an absolute autonomy and sovereignty on its own revenue raising and budget allocation power. But it needs the classification of taxes among the city and sub-city and is relatively a bit complex to implement and make it difficult the tax administration. Similarly the second option creates the opportunity to have sub-city own source revenue with a fair distribution of income, but its application as well as its administration seems complex. The third option has less autonomy than the two options (i.e. here the emphasis is more on what can be done rather than on what should be done) but is very simple and easy to implement and the revenue collection can continue with the existing system – Bole sub-city in collaboration with the federal tax authority or ERCA. More importantly the application of the third option will serve as a transition to either option one or two. Hence, an alternative optimal revenue sharing approach that will help not only to alleviate the stated fears and risks of participants but also to ensures a win-win solution for all stakeholders will be provided later in the recommendation part of this research. 4.2.2.2 Revenue collection Since Bole sub-City doesn’t have its own revenue to collect, it has been responsible to collect the city government revenue from taxes, non-taxes, fees, charges and penalties that are expected to be collected within the boundary of the sub-city. However, as shown on table 5 below, the tax and tax related collection tasks had delegated to the federal revenue authority -Ethiopian Revenue and Customs Authority- (ERCA) since July 2010/11fiscal year and the sub-city revenue collection responsibility has reduced to municipal related revenues only. According to the city charter, all the revenues and any other received public money collected either by ERCA sub-city branch office and its affiliate at woreda level or sub-city and woreda public finance administration offices has to be directly deposit to the highly centralized common pool called the ‘consolidated account’ –account of the city BoFED– which is managed and administered by the city Bureau of Finance and Economic Development (BoFED). “All public money shall be deposited in the consolidated fund to the credited of the bureau, except aid in kind which shall be recorded in the consolidated fund and therefore deemed to be deposited” (Proclamation No. 16/2009 Article 9:1). 64 Table 5, Assignment of revenue collection mandates between ERCA Bole sub-city branch office and Bole Sub-city office of Finance and economic development Bole sub-city ERCA Bole sub-city branch office Tax revenue Tax revenue Withholding employment income tax from Direct tax; employment income tax, private business employees of the sub-city including all sub- income tax, rental income tax and etc city sector offices and weredas within the Indirect tax; VAT, excise tax, turnover tax, sale of sub-city. stamp duty Non-tax revenue Non tax revenue Urban land lease, sale of public goods and service and administrative fees and charges. Municipality revenue Municipal revenue Municipality tax revenue, business house rent, sale of goods and city Penalties, rental income, service fee and charges, service and municipality service charge. sales and etc. Source: Derived from IBEX, ERCA database A. Revenue collection performance In general the city BoFED prepares the city government’s annual revenue raising plan and provides the cascaded collection assignment to each sub-city and ERCA branch offices. Bole sub-city as well as Bole sub-city ERCA branch office receives their portion of revenue collection responsibilities in the stated manner. Participants were asked to express their opinion on how they see their previous fiscal year revenue collection performance relative to their respective Sub-city or woreda taxable potential. 65 Table 6 Woreda level finance and economic development officers revenue collection performance self evaluation Woreda level revenue collection performance evaluation Item Number of responses Excellent % Very good 0 Good Fair 2 7 5 14.29 50.00 35.71 Poor Total 0 14 100 Source: Extracted from primary data collected (Questionnaire 2016) As shown in the table 6 above, 50% and 14.29% of the respondents evaluate their collection performance as “Good” and “Very good” respectively and the rest 35.71% fall under “Fair”. However, please note that, the stated self claimed performance evaluation rating is not relative to their respective administrative area taxable or economic potential as said in the question, rather it is relative to the collection plan set for that budget year. The reason given for lower level collection by sub-city and woreda level office of finance officers include; too inflated collection plan imposed by city BoFED, lack of motivation and commitment and too narrow revenue bases (i.e. woredas collecting revenues upon providing services from; law enforcement, trade and industry, vital events registration, housing and construction and culture and tourism). Moreover, respondents at Bole sub-city office of finance and economic development and ERCA Bole sub-city branch office reveal the difficulty to attain the annual collection plans set by the city BoFED. This top-down plan and enforcement without the consent of the sub-city and ERCA branch office create a burden and/or pressure to meet the planned revenue collection within the deadline. In particular the revenue collection performance of sub-city office of public finance administration main process and woreda level finance offices that are responsible to collect municipal related revenues is too far to attain. The city BoFED on its side argues that, if subcities are provided with much lesser amount to collect annually, they pay less effort and their collection will reduce accordingly. 66 B. Revenue collection incentives In relation to the previous inquiry of finance offices revenue collection performance, respondents were asked whether the city administration employ a kind of reword for satisfactory revenue collection efforts and penalty for poor or weak collection. Both sub-city and woreda finance officers and ERCA woreda level officers were asked to answer the question; “Is there any significant incentive or motivational scheme to acknowledge and reward your revenue collection effort?” and their response is presented in the following table. Table 7 Tax collectors’ response on revenue collection incentives Are there incentives for revenue collection efforts? Category of respondents Sub-city finance office Number Woreda finance officers % Number Total response ERCA woreda level officers % Number % Number % Yes 0 0 0 0 0 0 0 0 No 2 100 14 100 5 100 21 100 Total 2 100 14 100 5 100 21 100 Source: extracted from primary data collected (Questionnaire 2016) As can be seen in table 7 above, all respondents (100%) reply that there is no incentive scheme or reword system to acknowledge tax collection efforts or to motivate future collections. They further reveal that, there is no as such either significant institutional incentive to the sub-city or individual incentive to employees. It lacks motivational schemes like ‘carrot and stick’ or a system that reward and recognize achievements (financial reward most priority to motivate) and penalize failures and/or poor collection performance respectively. Since the annual collection plan is set unilaterally by city BoFED without the involvement and consent of the sub-city and ERCA Bole branch office, logically both entities might not be accountable for the failure to collect the said planned amount. In addition this top down, un participatory and unattainable plan may discourage and reduce the sub-city’s overall tax collection commitment, motivation and presumably lacks the interest to employ their ultimate tax collection effort. 67 According to the interviewees and questionnaire respondents response, had it been revenue collection efforts accompanied by some form of incentives either to the sub-city and/or woreda or to employees (who are engaging in the tax collection task), it can exert at least better collection efforts and commitment. Equally import to incentives schemes that participants repeatedly raise is the issue of unavailability of adequate finance or allowances to finance expenses accrued during employees’ site/field visit; for tax assessment, monitoring tax payers’ compliance, protecting tax evasions, enforcing tax laws and etc. Hence, lack of tax collection incentives and unavailability of adequate field visit allowances, at least enough to cover employee daily expenses, have negative impact on the day to day tax collection efforts of employees working in both under the sub-city and ERCA Bole branch office. C. Joint revenue collection performance As discussed earlier the revenue of the sub-city is collected by both the sub-city and ERCA Bole branch office and their affiliates at woreda level. Hence, the other related question provided to participants as it is described in the table below was the extent of tax collection collaboration between ERCA Bole branch office and Bole sub-city including their subordinate woreda level personnel. Table 8 Degree of tax collection collaboration between Bole Sub-city woreda level finance offices and ERCA Bole sub-city small tax payers branch woreda offices Category of participants Greater extent Alterative response variables S om e Very Not at extent minimal all Number of Woreda responses finance % Number of ERCA responses woreda office % Source: extracted from primary data collected (Questionnaire 2016) Don't know Total 14 14 100 100 5 5 100 100 As can be seen in table 8 above, 100% of the respondents and all the interviewees reply that there is no collaboration at all in discharging their revenue collection responsibilities. Bole subcity finance office and its woreda level offices collect revenue of the city on their way of 68 collection and capacity. Similarly ERCA Bole branch office and its affiliates at each woreda level collect revenue of the city on their own revenue collection system and with their available limited capacity (on average 8 personnel in each woreda). According to them, with the current reality of two independent revenue collection entities and structures, the revenue collection system don’t allow them to work together at least at sub-city and woreda level. ERCA Bole branch office personnel are directly accountable to the federal revenue authority or their mother company ERCA (where there is no dual accountable like some other countries do), while employees of the sub-city and woreda revenue collection staffs are obviously employee of the city administration. As a result, even though the two government bodies have given the mandate or the responsibility to collect revenues of the same city administration from the same administrative area, as so far they are not working together to ease the tax collection effort and help increase the revenue collection of the city. The participants further indicate that, had it been both entities working together in collaboration with one another by forming a kind of joint committee or team, they can alleviate the problems they facing while they are working independently. For instance ERCA branch offices are operating with a very minimum human resource capacity not more than 8 personnel in each of the 14 woredas, while there are a total of about 250 employees on average working in each of the woreda administrations. On the other hand, ERCA as federal revenue authority has huge capacity in terms of its technology and specialized expertise in revenue collection and administration. 4.2.2.3 Revenue collection performance within the boundary of Bole sub-city Even though Bole sub-city has no own revenue source to finance its expenditure responsibilities, it is worthwhile to analyze the revenue potential as well as its collections performance and share of contribution to the city government’s revenue. It is also helpful to examine the sub-city’s overall economic and taxable potential and be able to contrast the revenue contribution to the city administration with that of expenditure assignments (remit) to the sub-city. As said earlier the revenue collection of the sub-city is undertaken by Bole sub-city itself and ERCA Bole subcity small tax payers’ branch office. 69 4.2.2.4 Bole sub-city revenue collection performance The table below presents the planned and actual budget collections made within the boundary of Bole sub-city during the past eight years. The first five years 2006/07 to 2010/11 collections were made by Bole sub-city revenue office, in which it encompasses all tax and non tax revenues. The last three years, 2011/12 to 2013/14, collections were made by Bole sub-city office of finance and economic development (i.e. public finance administration main process) and the major share of the collection was from non-tax revenues and the rest from sub-city and wereda offices employees’ income tax withholdings. Table 9, Bole sub-city planned and actual revenue collection performance in birr from 2005/06 to 2014/15 Total planned and actual performance collection No. Fiscal year in % Plan Actual collection 2005/06 No plan provided 305,580,478.26 Annual growth % 1 2006/07 384,264,169.54 280,534,569.54 73.01 2 2007/08 463,450,000.00 438,573,457.23 94.63 56.00 3 2008/09 1,492,935,800.00 680,816,214.28 45.60 55.00 4 2009/10 1,063,242,000.00 956,019,860.57 89.92 40.00 5 2010/11 1,663,639,647.50 1,103,445,587.72 66.32 15.40 6 2011/12 1,594,357,664.96 380,135,641.09 7 2012/13 603,683,439.85 319,296,846.16 52.89 -19.05 8 2013/14 785,543,690.57 367,559,925.91 46.79 15.12 10 2014/15 870,856,567.70 586,749,767.09 67.38 60.00 3,854,441,363.08 1,653,742,180.25 TOTAL Source: Finance and Economic Development; study, plan & budget main process 2011/12 and 2013/14 annual reports, Bole sub-city office, Addis Ababa. As shown on table 9 above the revenue collection trend until fiscal year 2010/11 has been improved from year to year with an increasing rate and each year’s collection performance relative to their respective planed revenue is said to be progressive. The AACA had planned to 70 collect 5,067,531,617.04 during fiscal year 2006/07-2010/11 from Bole sub-city and actually collected 3,459,389,689.34 - it achieved 68.27% of its plan. On the other hand the city administration plan to collect 1.594 Million birr during fiscal year 2011/12 jointly by the sub-city office of finance and economic development and ERCA Bole sub-city branch office and the subcity finance office has able to collected 380,135,641.09 birr. Starting from the budget year 2012/13, the city BoFED assign a separate revenue collection plan to the sub-city and during the budget year 2012/13 to 2014/15 it collected 1,273,606,539.16 birr out of the planned 2,260,083,698.12 birr which is 56.35% of the plan. The last three years revenue collection performance of the sub-city is said to be weak and is a bit higher than half the collection plan. 4.2.2.5 ERCA Bole sub-city branch office revenue collection performance The most widely applicable tax administration models in a decentralized form of government include; central administration with revenue sharing, central tax administration with assignment of taxing powers to different levels of government, multilevel administration with revenue sharing and self-administration by each level of government (Taliercio 2005). Among others sub-national/local autonomy and efficiency (i.e. reducing administrative and compliance costs as much as possible through economies of scale and scope) are the most widely used criterion in choosing the appropriate and/or the optimal tax administration model. Sub-national or local governments’ narrow revenue source or limited power to raise revenues and limited collection capacity in some countries; like china, Cambodia, Vietnam, Thailand and etc, necessitate central government revenue ministries/authorities intervene in the tax collection and administration of sub-national governments with the objective to ensure uniformity of tax collection and administration across the country and to avoid duplication of efforts (McLure and Martinez-Vazquez 2002, Taliercio 2005). AACA signed Memorandum of Understanding (MoU) with Ethiopian Revenue and Customs Authority (ERCA) to officially grant the city’s tax and tax related revenue collection mandate since July 2011/12 fiscal year. Since then ERCA open one branch office in each of the ten sub-cites and in each woreda offices under the ten branches. As a result the city government tax and tax related revenues that were previously collected by subcities and woredas are now collected by ERCA sub-city branch and woreda offices. 71 As indicated on table 10 below ERCA Bole branch office currently has 365 employees where 249 are working at the sub-city level and the rest 116 at woreda level (i.e. on average 8 personnel in each of the 14 woredas). With regard to their academic qualification, out of the stated total employees 287 or 78.63% are first degree holders and the rest 78 or 21.37% have diploma and below. Table 10 ERCA Bole sub-city branch office staff composition Academic qualification Sub-city level Wereda level Total number of staff under Bole sub-city branch Male 103 19 122 Female 146 97 243 Total 249 116 365 Diploma Degree holders and below 287 78 287 78 Source: ERCA Bole branch office human resource main process Similar to ERCA head office and other branch offices, Bole branch office faces high employee turnover. This is on one hand due to higher demand of its employees by banks and the emerging private sector with higher attractive pay and on the other hand job insecurity is one of the major factor that push employees to leave the institution – i.e. the probability of making documentation or recording error is highly certain and simple financial record/ numerical error may cause thousands or millions of birr or even more loss. For instance during the past nine months of this fiscal year alone, around 65 employees had already quite the branch office. The total number of staffs in fiscal year 2012/13 was 540, out of which 365 are currently in their position (as said earlier) and 40 are transferred to other newly established branch office for middle level tax payers and the rest 135 had left the institution. This implies the branch office is undertaking its tax collection responsibilities with pressure and is overloaded. This in turn increases employees’ fear of making mistakes and reduce efficiency of service delivery and their tax collection effort. As a result, tax payers may discourage to pay taxes willingly and consequently reduce the revenue of the sub-city as well as the city administration. 72 A. ERCA Bole branch office revenue collection performance As repeatedly said in the previous sub-sections, the annual revenue collection plan is determined by the city BoFED and provided to the sub-city ERCA branch office for execution or collection. Table 11, below shows the tax and tax related revenues collected within the boundary of Bole sub-city since the establishment of ERCA Bole sub-city branch office in 2011/12 fiscal year. Table 11 ERCA Bole sub-city branch office tax and tax related revenue collections in birr during fiscal year 2011/12 - 2013/14 Planned and actual No. collection Fiscal year plan Actual collection Annual Collection collection performance growth in % in % 1 2011/12 1,134,684,641.00 897,310,734.53 79.08 2 2012/13 1,121,290.000.00 1,061,862,689.00 94.70 18.34 3 2013/14 1,347,747,431.68 1,208,295,332.35 89.65 13.79 4 Total 3,603,722,072.68 3,167,468,755.88 87.89 Source: ERCA data base Since July 2011/12 till June 2013/14 fiscal years the branch office received from the city BoFED total collection plan of 3,603,722,072.68 birr and actually collected 3,167,468,755.88 birr. It has achieved 87.89% of the plan and is a remarkable improvement in the revenue collection performance history of the sub-city. According to Bole sub-city ERCA branch office expertise, the registered achievement is mainly the result of ERCAs’ automated & modern tax administration system, human capital and experience accumulated for years. 4.2.2.6 Actual revenue collection within the boundary of Bole sub-city and relative budget assignment In comparing the actual tax collection performance with the total budget allocation made to the sub-city from the city administration, it is quite logical to take 2011/12 fiscal year as base year where ERCA branch office has established and begun its revenue collection mandates. This is 73 because the revenue collection capacity and performance before fiscal year 2011/12 was so weak and can’t be the true representative of the sub-city’s taxable potential. The city administration itself has admitted the ineffective tax collation performance of the city, and thus granted the mandate to the federal tax authority or ERCA. Thus using the data prior to fiscal year 2011/12 definitely misleads and if used, it leads to erroneous conclusion. The total revenue collected during the past three fiscal years (as summarized on table12 below) were 4,234,461,169.04 birr and the total budget allocated to the sub-city from the city administration within the same period was 1,847,477,953.03 birr. On average the sub-city has received in the form of intergovernmental transfer or grant from the city administration only 43.63% of the revenue collected within its boundary as its total (capital and recurrent) annual budget and the rest 56.37% remain in the city BoFED treasury to be used for other budgetary institutions of the city administration, other sub-cities and city level sector bureaus and agencies. On the other hand, out of the total collection made 74.80% (tax and tax related revenue) was collected by ERCA Bole branch office and the rest 25.20% (revenue from non tax and sub-city and weredas employees’ income tax) collected by Bole sub-city office of finance and economic development or public finance management main process. Table 12 Summary of actual revenue collection and budget assignment within the boundary of Bole sub sub-city in Birr 2011/12 - 2013/14 Revenue collected by Fiscal ERCA Bole year branch office Bole sub-city Budget Total collection allocated to Bole sub-city 2011/12 897,310,734.53 380,135,641.09 1,277,446,375.62 447,070,003.42 2012/13 1,061,862,689.00 319,296,846.16 1,381,159,535.16 614,276,683.46 2013/14 1,208,295,332.35 367,559,925.91 1,575,855,258.26 786,131,266.15 Total 3,167,468,755.88 1,066,992,413.16 4,234,461,169.04 1,847,477,953.03 74.80% 25.20% 100% 43.63% percentage Source: Computed from table 9 and table 11 74 Nevertheless for the purpose of clarity and to make readers more informed about the revenue collection and expenditure assignment made during the past eight fiscal years, an illustration has depicted here under in the following chart (chart two). Chart 2 Comparison of Bole sub-city total revenue collections with its expenditure assignment in Birr 2006/07 - 2013/14. 1,600,000,000.00 Actual total revenue collection within Bole subcity Total expenditure assignment to Bole sub-city 1,400,000,000.00 1,200,000,000.00 Revenue shared to AACA 1,000,000,000.00 800,000,000.00 600,000,000.00 400,000,000.00 200,000,000.00 0 .0 0 2006/072007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 Source: Finance and Economic Development; study, plan & budget main process 2011/12 and 2013/14 annual report, Bole sub-city office and ERCA database, Addis Ababa 4.2.3 Intergovernmental transfer Intergovernmental transfer deals with how governments at different tier interacts on fiscal matters and aids to ensure each level of government receive adequate fund in proportion to the expenditure responsibilities assigned to them. In principle the very purpose of intergovernmental transfer or grant is; 1) to fill vertical gaps that may occur between higher level and subordinate levels of governments, 2) to finance special programmes or polices of national government 75 which will be executed by sub-national governments and 3) to narrow horizontal disparities among sub-national governments. In our case, the main purpose of intergovernmental transfer made from the city administration to Bole sub-city is not to enhance the said gap filling or disparity narrowing role. It rather provides the sole revenue allocated to the sub-city so as to carry out its overall expenditure responsibilities within its administrative boundary. A. Provision of city revenue sharing formula to Sub-cities As already discussed earlier the expenditure responsibilities of the sub-city is 100% covered through intergovernmental transfer made by the city administration. The city BoFED has given an exclusive fiscal mandate not only to design the format for fiscal frame work and preparation of aggregate city level annual budget preparation and submission to city council but also to formulate and/or prepare budget allocation formula for sub-cites. (Proclamation No. 16/2009 Article 20:2). Elements of the formula encompasses previous year overall sub-city budget, inflation and other expenditure modification factors - like population size variation from that of previous fiscal year. Due to this and other factors that are discussed earlier, elements of the formula are exposed to biasdness and mislead the budget allocation quantity. More importantly, formula approach is not advisable if development is the primary objective of the government and since elements of the formula and their associated weight are determined by the central government, in this case by the city BoFED, they can serve the goal of central government better than sub-national/local governments’ objectives (Bahl 2008). For instance, as shown in the formula elements below -in Ethiopian context- it is difficult to determine objectively the actual population size of each subcity on a year to year base. Other similar examples were also given in the previous sub-section while discussing the difficulty to get the actual number of service users in time in the determination of annual service user’s budget. As per the city BoFED expertise, the formula has also 6% incentive for the revenue collection performance. However, so far there is no single sub-city benefited from the 6% revenue collection incentive. This is because, from the sub-city point of, 6% incentive is insignificant to motivate an institution and in particular the annual revenue collection plan imposed on them by the city BoFED is unattainable. 76 Sub-city budget allocation formula Budget of YY year = A + (B) Where: YY: Fiscal or budget year A: Sub-cities and woredas previous year recurrent budget B: Inflation and other expenditure modification* *Expenditure modification consists; 6% and 5% of the allocated budget for the sub-city’s revenue collection effort and population size respectively. B. Type of intergovernmental transfer The type of intergovernmental transfer usually dictates higher level governments’ intent or objective on how and where local governments have to utilize the grant provided. According to city BoFED expertise the revenue assigned to sub-cities is block grant and sub-cities are free to spend where ever they think is appropriate to discharge their devolved expenditure responsibilities. However as discussed briefly in the previous sub-sections, though what has been said by city BoFED expertise is considerably true in some instances or in practice the budget assigned to sub-cities are a mix of specific and block grants. According to sub-city fiancé office officers’ response, some sector offices budgets are specifically determined by city BoFED and the main purpose of those specific grants is to realize the strategic plan and development priorities of the city government. Those sector offices categorized under specific budgets include; education, health, micro and small scale enterprises, youth and sport and etc. 77 Table 13 Sub-city and woreda level officers’ response on the 100% budget dependence on intergovernmental transfer Item Number of responses Do you agree with the current 100% budget dependence on city administration? Strongly Somewhat Strongly agree agree disagree Agree Disagree 0 8 19 Total 12 0 39 % 0 20.51 48.72 30.77 Source: extracted from primary data collected (Questionnaire 2016) 0 100 Respondents were also asked to disclose how they perceive their 100% budget dependence on intergovernmental transfer. As shown in table 13, 48.72% of the respondents reply “somewhat agree” and the rest 12% and 8% reply “disagree” and “agree” respectively. Those of whom reply somewhat agree reveals that, they neither satisfied and believe with the provision of funds from city government nor confident in the current financial system, finance utilization capacity and law enforcement of the sub-city and its woredas and they further emphasize the risk of rent seeking activities observed in particular at woreda administrations. Hence even though they need to see devolved revenue raising power within their sub-city and woredas so as to improve their revenue requirements which in turn help to improve service provisions within their administrative boundary, they still have the fear that the stated problems may get worsen and intensify misuse of public money. Similarly those respondents who reply “Agree” and “Disagree” stood at the two extreme ends of the above opinions and don’t want to compromise. Meaning, recognizing the stated problems in mind, the former prefers intergovernmental transfer over devolution of revenue power and the later prefers vice-versa. Accordingly, from the sub-city office of finance officers and official point of view, even though absolute budget dependence on city government has its own negative impacts like availability of limited fund transferred from the city and no other option to increase the revenue requirement of the sub-city. It is still the better choice to rely on intergovernmental transfer so as to ensure the equitable utilization of city financial resource indiscriminately across the city. Not surprisingly, the city BoFED experts have also similar view with that of sub-city officials and officers. What they emphasize in addition to the issue of equitability or redistribution is that intergovernmental 78 transfer enables to efficiently utilize scarce city financial resource to priority areas and ensure balanced development and growth among all sub-cities. To sum up, an absolute dependence on intergovernmental transfer has its own negative consequences both to the provider (higher level government) and receiver (local government) in that higher level government like in this case AACA has the responsibility to provide adequate fund to its all budgeter government institutions operating under its administration. Since subcities provide services to the extent of the fund provided through intergovernmental transfer, subcities may not be accountable for the failure to provide adequate public services to their constituents. On the other hand the sub-city and its woreda sector offices oblige to review their plan every year as per the amount of fund released to run their offices and it indirectly limits their decision making power over the quantity and quality of service provisions. 4.2.4 Borrowing In the city administration financial system borrowing is an exclusive right reserved to the city government. The city BoFED can borrow on behalf of the city government with prior authorization of the city council from domestic sources directly or by way of selling bonds. It has also given the right to identify international credit sources and solicit the federal government Ministry (MoFED) to take loans on its behalf. But the amount to be borrowed should not exceed the determined level by the Ministry of Finance and Economic Development (MoFED). Bole sub-city and the rest of sub-cities and weredas of the city are not allowed to engage in any borrowing or loan activities (Proclamation No. 361/2003, Article 54:4). This is in fact true and is logical where sub-national governments’ expenditure financing is absolutely (100%) dependent on intergovernmental transfer and have no own source revenue to repay their debt. However the mandate given to the city can also be given to sub-cities with similar terms and conditions, if the revenue side further devolved to sub-cities to enable them generate and utilize their own source revenue without any unnecessary higher level government intervention. 79 4.3 Summary and major findings The objective of this sub-section is to summarize and outline major findings of the study from the preceding sub-sections. The findings are thus presented in accordance with their respective thematic areas in the following manner. A. Expenditure side 1. The financing of the sub-city’s expenditure responsibility is 100% dependent on city administration budget transfer and are constrained by the budget ceiling fixed to each sector offices operating within the sub-city. This absolute budget dependence on higher level government and lack of own-source revenue generation and utilization power limits the availability of adequate fund in which the sub-city needs to sufficiently address societal needs and preferences. Moreover, budget ceiling provided up on budget calling to each sector offices indirectly limits sub-city and woreda level sector office officers’ budget setting autonomy and are oblige to strictly stick to the extent of the available fund rather than decide by their own on what they actual demand to satisfy the needs of their residents. Consequently sub-city as well as woreda level sector offices might not be fully accountable for the failure not to provide the required public services, as they would in the case of sub-city’s own-source revenue generation and utilization, and push the failure blame and accountability claims back to the city administration for not providing adequate finance. As a result the sub-city’s discretionary power to determine the quantity as well as the quality of public service delivery is insignificant and is restricted. 2. Contrary to inadequacy of budget claims by sub-city and woreda sector offices, huge amount of unspent/unused budget of the sub-city returned back to the city treasury at the end of every fiscal year. In this regards poor capital projects execution performance takes the lion share of this huge amount of unspent budget and this is due to; top-down planning of capital budgets release without close collaboration and consent of sub-city’s concerned officials and without considering sub-city’s actual pre-project preparation circumstances and stakeholders coordination failure are the major impediments of infrastructural and other development activities in addition to implementers lack of commitment and human resource capacity related problems. This in turn significantly 80 reduced sense of ownership in administering infrastructural and other capital projects, increase cost of projects and hold back the expected services gains from those projects. 3. Finance officers’ unattractive salary relative to the work burden and responsibility results higher turnover and forced each woredas’ finance offices to operate with inadequate number of professionals, inexperienced and incapable staff/personnel. In addition numerous work related problems were also revealed as driving forces for higher turnover, personnel’s dissatisfaction and lack of interest to serve the society. Among others the major problems include; un pleasant and very compact working environment, poor employment benefit scheme, lack of equal treatment and respect, lack of professionalism and dominance of patronage, promotion in favor of political believe rather than actual execution capacity, lack of administrative freedom to make decisions, political appointees extreme interference in administrating financial matters and etc. 4. Employees perception and believe towards the current working culture has an adverse impact on the overall service provision of the sub-city. Higher officials’ lack of leadership capability, lack of genuine commitment to serve the society, lack of technical know-how of sector offices and negligence to properly utilize public resources are the most observed problems seen in all woredas. Personnel’s in most cases seen as, they are simply doer of what is passed from their superiors and are not allowed to think, to actively engage in planning, decision making and so forth. This in turn, in addition to unattractive pay and unpleasant working environment highly de-motivate them and lead them either to opt to quit or being passive workers. 5. One of the big problems sub-city as well as woreda level finance officers suffers a lot in administering budget requests and opens a room for corruption is the budget requested by sector offices’ officials for “training” related expenditures. Providing too exaggerated training participants and associate allowances, training facilities, transport allowances, provision of trainings other than the intended objectives of sector offices and etc are the most well familiar unjustified and unconvincing expenditures experienced in each of the woreda sector offices. The highly likely current malfunction and/or corruption might be an indication for poor public finance administration performance and it is indeed an 81 impediment to the immediate devolution of own source revenue generation and utilization power. 6. In every fiscal year part of each woredas’ budget goes to their respective woreda level ruling party offices, without any legal basis, to finance all its recurrent and capital expenditures. Moreover, there is no demarcation between government and party mandates in particular in utilizing public resources and property. In most cases priority is given to party functions than public services provisions and even during election campaigns some sector offices budgets withheld and transferred to the party operations. All woreda level party offices are located either in the same building of the woreda or within its compound. As a result service provider sector offices in aggregate lose substantial amount of their allocated budget which might help them delivery public services in a better quantity and quality within their respective woredas. B. Revenue side 7. Regarding the revenue side, even though Article 57 of the city administration charter clearly indicates and granted the power to the city council to designate those revenues of the city collected and directly utilized by sub-cites, it still didn’t in effect. Lack of own source revenue autonomy, leads the sub-city to fully concentrate on the administration of the assigned/allocated budget expenditure, rather than actively engaging in how to generate adequate revenues to help improve and provide better public service provisions and finance the execution of infrastructural as well as development activities. The legal mandate as well as the actual practice of the sub-city proves that, the sub-city has no devolved own source revenue generation and utilization discretionary power. 8. Lack of discretionary revenue raising autonomy and own source revenue on one hand and an absolute budget dependence on city administration on the other hand have a big negative impact on sub-city and woreda level sector offices’ operation. It is difficult to set up long term plans and function accordingly. They usually enforced to revise even their annual plan to much service delivery expenditures with that of the budget provided. 82 Thus, planning on the bases of the actual demand of resident and function accordingly is a chronic problem of each sector offices operating within the sub-city. 9. Even though the revenue collection trend during the past four years shows a remarkable improvement, the taxable potential of the sub-city has not yet adequately exploited. Unattainable and un participatory top-down annual revenue collection plan imposed by city BoFED, unavailability of adequate field visit allowances followed by lack of viable incentive scheme or reword system to acknowledge tax collection efforts and to motivate future collections significantly reduce the moral of tax collectors and lacks the interest to actively engage in the tax collection tasks. 10. Bole sub-city finance office and its woreda level offices collect revenue of the city independently and likewise ERCA Bole branch office and its affiliates at each woreda level collect revenue of the city on their own revenue collection system and with their available limited human capacity. Had it been both entities working together in collaboration with one another by forming a kind of joint committee or team, they can alleviate the problems they face while they are operating independently (i.e. relatively ERCA has better expertise and technology while the sub-city has higher number of personnel in each woredas). Lack of collaboration between Bole sub-city and woreda level tax collectors and ERCA Bole sub-city small tax payers’ branch office and its’ affiliate at woreda level in discharging their revenue collection responsibilities is thus considered as hindrance to better collection performance. Unfortunately, since the annual collection plan is set unilaterally by city BoFED without the involvement and consent of the sub-city and ERCA Bole branch office, logically both entities might not be accountable for the failure not to collect the said planned amount. 11. The tax administration system lacks revenue collection incentive scheme or rewording system to acknowledge tax collection efforts or to motivate future collections. It neither has significant institutional incentive to the sub-city nor individual incentive to tax collector employees. Hence, lack of tax collection incentive and unavailability of adequate field visit allowances, at least enough to cover employee daily expenses, have 83 negative impact on the day to day tax collection efforts of employees working in both under the sub-city and ERCA Bole sub-city small tax payers branch offices. C. Intergovernmental transfer 12. The purpose of intergovernmental transfer employed in the city administration serve as the only revenue source to the sub-city to finance its devolved overall expenditure responsibilities, rather than filling vertical and/or horizontal fiscal gaps discussed in the literature part of this paper. D. Borrowing power 13. Since the sub-city has no own source revenue generation power, the possibility to acquire funds through loan or borrowing Article 54:4 of the city charter prohibited the sub-city from engaging in any borrowing and/or loan activities from any sources is unthinkable, unless the city administration granted the mandate. 84 CHAPTER FIVE 5. CONCLUSION AND RECOMMENDATIONS 5.1 CONCLUSION In sum, the key difference in the system of centralized to decentralized form of fiscal system is that which level of government has taxing and spending discretionary power over their resources within their respective jurisdiction. The main objective of this paper was to identify, examine and analyze the legal mandates, practices as well as problems of aspects of fiscal powers devolved to Bole sub-city, since the implementation of the revised AACA charter in 2003. The topic has cascade into aspects of fiscal decentralization namely; Expenditure responsibilities, Revenue assignment, intergovernmental transfer or grant and borrowing. On the bases of the study findings the research has reached to the following conclusions. Public service delivery functions are said to be adequately devolved to Bole sub-city and are working in collaboration with city bureaus and wereda offices. The problem lies on the financing and execution of those expenditure responsibilities efficiently and effectively. The sub-city’s budgeting autonomy is constrained by supply of limited available fund and budget ceiling imposed by city BoFED. Moreover, an absolute budget dependence on city administration eroded the sub-city and woreda officials’ decision making powers on development activities, quantity as well as quality of public service delivery improvements in accordance with local demand and makes it difficult to ensure downward accountability and attain efficiency gains associated with fiscal decentralization. Besides even though presentation of each sector offices’ annual budget on posters is appreciable, inability to publicize genuine sector offices’ year-end actual performance evaluation against budget raises the question of transparency. The absolute budget dependence on city government on one hand and the allocation of specific grants to some sector offices on the hand leads the sub-city and woredas, in some way, being spending agents of the city administration’s plans and priorities. Not only that the sub-city’s overall public service provision faces numerous non fiscal related problems. Among others the core challenges include; 1) All woreda level ruling party offices illegal consumption of their respective woredas allocated budgets substantially reduce service provider sector offices’ budget. 85 2) Woredas’ inability to efficiently and effectively utilize the available fund (allocated budget) in addition to corruption and malfunction lead financing of sector offices’ service provision even worse. 3) Higher officials’ poor leadership capability, lack of commitment to serve the society in addition to unattractive pay and unpleasant working environment highly de-motivate in particular woreda level service provider sector offices’ personnel and lead them either to opt to quit or being passive workers. As a result, out of the overall sub-city’s allocated budget considerable amount of fund lost before it reaches to the final service provider sector offices. Regarding the revenue side, Bole sub-city has no local autonomy or devolved revenue generation/taxing power at all to decide the level of revenue to be raised within its own jurisdiction and unquestionably no direct utilization power. Similarly lack of own source revenue raising authority significantly reduce sub-city and woreda officials decision making power over local preferences and priorities. The sole role of the sub-city with regard to the revenue side is said to be no more than being revenue collecting agent of AACA. Even though the revenue collection trend during the past four years shows a remarkable improvement; unattainable and un participatory top-down annual revenue collection plan imposed by city BoFED and unavailability of adequate field visit allowances followed by lack of viable tax collection incentive scheme and lack of collaboration between Bole sub-city and woreda level tax collectors and ERCA Bole sub-city small tax payers’ branch office and its affiliate at woreda level considerably weaken the tax collection effort and ultimately limit the amount of collection far below the expectation and fail to exploit sub-city’s taxable potential. The current revenue sharing to sub-cities through formula approach don’t ensure the city’s desired to enhance competition among sub-cities, be it in terms of revenue raising, service provision or growth and development among sub-cities (i.e. which is one of the major objectives of the city administration). The sub-city receives from the city administration on average, during the fiscal years 2011/12 to 2013/14, annual budget (capital and recurrent) assignment of 43.63% of the revenue generated from its jurisdiction among of which only 31% is actual utilized and the rest unspent fund returned back to the city treasure. 86 5.2 RECOMMENDATIONS The ultimate objective of fiscal decentralization is to increase the decision making power of subnational government officials and to bring government closer to the people so as to improve economic performance, enhance efficiency of public sector service provisions and ensure more downward accountability. In line with this perspective and the aforementioned conclusions the researcher recommended the following policy alternatives so as to resolve the problems posed as research questions. It is imperative to consider the actual working environment and administrative culture of the subcity and proposes some but very crucial prerequisites that need to be implemented before the execution of the subsequent recommendations. Hence, strong political commitment and willingness to halt ruling party offices consumption of sub-city as well as woredas’ budgets is essential. Ensure woreda level political appointees and/or officials to effectively and genuinely discharge their obligation in utilizing public finance resources and enforce financial matter rules and regulations. And set up well-built but workable public finance utilization controlling system, so as to reduce the highly likely corruption and malfunction. Moreover, it is necessary to build the moral and motivation of personnel by addressing the following key points. Build the institutional capacity to the required level and improve/upgrade leadership capability of appointed officials and administrative/managerial level officers, improve non-managerial personnel execution capacity so as to improve budget utilization performance and be able to provide efficient and effective public service. Empower real administrative decision making power to professionals and reduce that of appointed official intervention and employ performance based financial incentives. With respect to the revenue side of the sub-city, revenue sharing assignment with the method of derivation approach over formula approach is an alternative choice recommended by the researcher. Unlike revenue sharing through formula, the amount of revenue shared to Bole subcity through derivative approach is based on the amount (proportion) of actual revenue collection made within the sub-city’s boundary. Not only that it also stimulates and increases the tax collection effort and significantly improve and/or maximizes the amount of the sub-city’s annual revenue. The recommended option mainly considers more on what can be done with current capacity of the sub-city rather than on what should be done. 87 Thus, the researcher recommends the assignment of 55% out of the total revenue collection made within the boundary of Bole sub-city as sub-city’s “own-source” revenue. The annual revenue collection plan can be (if in demand) set by the mutual consent of the sub-city, ERCA Bole SubCity small tax payers branch office and AACA-BoFED. Equally important, collaboration between Bole sub-city and ERCA Bole sub-city small tax payers’ branch office revenue collectors has an irreplaceable role. Since sub-city and woredas are closer to the people, they are relatively in a better position to assess and identify; tax evaders, under declared incomes, illegal traders, non-tax payers and be able to capture and bring the lucrative outdoor advertisement and rental revenue into the tax net. By doing so, provided the tax collection effort, the sub-city revenue will increase substantially while the city administration’s revenue will also increase proportional (pro rata). Since the sub-city is authorized to engage in generating its own revenue from its “own revenue source” it automatically posses the autonomy to formulate its’ own budget. These in turn increase the autonomy and decision making power of sub-city and woreda level officials and ensure more down ward accountability to voters for the service they provided and will help them to address their election promises. More importantly it can help to ensure improved public service delivery to the level of actual demand and promotes revenue generation, growth and development competition among sub-cities and eventually avoid unnecessary bureaucratic procedures between the city and sub-city administration in dealing with fiscal matters. The city audit bureau may undertake periodic auditing so as to verify whether public money is actually spent in line with the objectives and to the intended purposes. Moreover, the city administration may set and enforce mandatory acceptable/minimum level of public service delivery standards across Sub-Cities. The city council can exercise its mandate to grant such kind of experimentations in the city and amend those articles that restrict the devolution of sub-city own revenue raising power and complete own budget formulation autonomy (Proclamation No. 361/2003, Article 64:1). 88 Reference AACA - BoFED 2012, Annual budget performance report, Addis Ababa, BoFED AACA - BoFED July 2014, Annual budget performance report, Addis Ababa, BoFED AACA - BoFED March 2014, Plan preparation, monitoring and evaluation manual annual, Addis Ababa, BoFED Bahl Roy 2000, ‘Intergovernmental Transfers in Developing and Transition countries: principles and practice’, World Bank, Urban and local government series 21097, 1818 H Street, NY Washington, DC 20433 US Bahl Roy and Jorge Martinez-Vazquez 2006, ‘Sequencing Fiscal Decentralization’, World Bank Policy Research Working Paper 3914, Andrew Young School of Policy Studies Georgia State University Atlanta, Georgia 30303 Bahl Roy 2008, ‘The pillars of Fiscal Decentralization’, CAF working paper No. 2008/07, Georgia State University Bahru Zewde and Siegfried Pausewang 2002, ‘Ethiopia the challenge of democracy from below’, Nordiska Afrikainstitute, Uppsala and Forum for Social Studies, Printed in Sweden by Elanders Gotab, Stockholm Bahru Zewde 2013, ‘A history of Modern Ethiopia 1855-1991’, Addis Ababa, Addis Ababa university press Bole sub-city annual report 2011/12, Bole sub-city administration social and economic image, office of finance and economic development – study, plan and budget main process, Addis Aababa Bole sub-city annual report 2013/14, Bole sub-city administration social and economic image, office of finance and economic development – study, plan and budget main process, Addis Aababa 89 Dafflon Bernard and Thierry Madies, 2011, ‘Decentralization: A few principles from the theory of fiscal Federalism’, revised version (Agence Francaise de Develppement, Paris, Notes and documents No. 42). 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Printed in the Netherlands. 91 Oates Wallace E. 1999, ‘An essay on fiscal federalism’, Journal of Economics Literature, Vol.34, No.3, pp. 1120-1149, American Economic Association. Oates Wallace E. 1993, ‘Fiscal decentralization and economic development’, National tax journal Vol. 46, No. 2, pp 273-43, University of Maryland, College Park, MD 20742. OECD Hansjorg Blochliger (ed.) 2013, Fiscal Federalism 2014: Making decentralization work, OECD publishing OECD/Korea Institute of Public Finance 2013, Measuring Fiscal Decentralization: Concepts and Policies, OECD Fiscal Federalism Studies, OECD Publishing. Proclamation No. 16/2009, a proclamation to provide for the financial administration of the Addis Ababa City Government, Addis Ababa Proclamation No. 361/2003, the Addis Ababa City Government Revised Charter, Addis Ababa. 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The Mahbub ul Haq Memorial Lecture” Pakistan Society of Development Economists, Islamabad, ©The Pakistan Development Review 49:4 Part I (Winter 2010) pp. 311–332 Taye Assefa & Tegegne Gebre-Egziabher, Kassahun Berhanu 2007, ‘Decentralization in Ethiopia’, Addis Ababa, Forum for Social Studies (FSS) Tiebout Charles M. 1956, ‘A pure theory of local expenditures’, the journal of political economy, Vol. 64, No. 5, pp. 416-424, the university of Chicago press, http://www.jstor.org/stable/1826343 Tiebout Charles M. 1961, ‘Public Finances: Needs, Sources, and Utilization’, UniversitiesNational Bureau, an Economic Theory of Fiscal Decentralization, (p. 79 - 96), university of California, Los Angeles, Princeton University Press Vulovic, Violeta 2011, ‘Sub-National Borrowing, Is It Really a Danger?’, Dissertation, Georgia State University, http://scholarworks.gsu.edu/econ_diss/77 World Bank 2008, ‘Decentralization in client countries, an evaluation of World Bank support’, 1990-2007, International Bank for Reconstruction and Development/ the World Bank/, Washington DC 20433, http://www.worldbank.org/ieg World Bank 1999, ‘Decentralization briefing Notes’, briefing note and PREM network, edited by Jennie Litvack and Jessica Seddon World Bank institute, Washington D.C. Xavier Calsamiglia, Teresa Garcia-Milà and Therese J. McGuire 2006, ‘Why do differences in the degree of fiscal decentralization endure?’, Center for Economic Studies & info institute for economic research, Munchen. 93 Appendix I - Interview Questions Addis Ababa University College of Business and Economics Department of Public Administration and Development Management Research on Fiscal decentralization in Addis Ababa city administration, the case of Bole sub-city I. Interview questions to Bole sub-city administration, office of finance and economic development and woreda level finance and economic development offices. A. Expenditure responsibilities related questioners 1. How do you prepare your annual overall sub-city’s recurrent and capital budget? 2. How do you determine your annual public service provision quantity and quality? 3. What is the role of sub-city office of finance and economic development, other sector offices and woredas in annual budget preparation? - Explain budget request and submission procedure 4. Have you ever experience budget deficit? - If yes, how did you manage it? - If no, why? 5. How do you see end of fiscal year transfers and unplanned purchases with respect to corruption and/or malfunction? (In particular purchases made in May and June). 6. Your sub-city budget utilization performance is said to be weak, in particular capital budget utilization, why is such unspent huge amount of budget returned back to the city treasury every year? 7. How do you see your sub-city overall expenditure autonomy? I B. Revenue responsibilities related questioners 1. How do you see the revenue potential of the sub-city? 2. Do you have the authority or the discretionary power to determine rates of fees, charges and penalties? 3. Do you have the right/mandate to directly utilize the revenue collected within your boundary? - If yes what are those revenue sources? 4. What if your annual revenue collection performance is too low? Is there any budget reduction/restriction or any poor revenue collection performance related measures? 5. Is there any incentive to motivate or reward revenue collection effort? 6. What do you say about the revenue allocation formula? 7. Do you have any other alternative revenue allocation approach that would better benefit your sub-city? 8. How do you treat financial grants provided by an entity, other than AACA and federal government, for the undertaking of various public projects in your sub-city? 9. What if revenue sources devolved to your sub-city, do you think it would have significant impact on revenue collection, quality as well as quantity of public service provisions? 10. To what extent do you think the sub-city can efficiently and effectively utilize its own revenue resources? And does it has the capacity to do so? C. Intergovernmental transfer 1. What is the purpose of intergovernmental transfer in the Addis Ababa city administration fiscal system? 2. The 2003 city charter describes that sub-cities will be provided block grant revenues to discharge their expenditure responsibilities, is it really block grant that you get from the city administration? 3. Are you interested with the budget transfer from AACA? 4. Do you think it is appropriate? If not what do you suggest? II D. Borrowing 1. Sub-cities are restricted by law (city 2003 charter) not to engage in borrowing activities, what is your opinion in this regard? E. General 1. How do you see your sub-city annual budget relative to the revenue collected within the boundary of your sub-city? 2. How do you reconcile the interest and preference of your constituencies with that of the city administration program and strategy? 3. How do you see the match between your expenditure responsibilities with that of actual budget assignment? 4. What kind of support (i.e. fiscal related capacity building, financial management trainings and etc) does the city administration provided to your sub-city? 5. What is your overall impression or view towards the devolution of fiscal power to your sub-city? II. Interview questions to AACA Bureau of Finance and Economic Development (BoFED) A. Sub-city budget allocation 1. Do you involve a sub-city while you plan capital projects for a specific sub-city? 2. A sub-city said, capital budgets are released without their prior consent and undertaking of pre-project preparations, and this is one of the reasons for failing to use capital budgets within that budget year. So why didn’t your bureau fail to comply with the demand of the sub-city and work in collaboration with sub-city before you actually release the fund? 3. How can we say that sub-cities have devolved budgeting autonomy, since their budget formulation is constrained by budget ceiling provided by your bureau? III 4. How can you prevent or control sub-city end of fiscal year unplanned purchases and unused fund transfers that may open a room for corruption and malfunctions? 5. What do you think is the root cause/problem that such huge amount (on average 1.2 billion birr) of unspent budget returned back to the city BoFED treasury at the end of every fiscal year? 6. What do you say about the budgeting autonomy of sub-cities? B. Sub-city revenue assignment 1. Can you tell me why revenue sources are not devolved to sub-cities? 2. Sub-city annual revenue collection plans are determined by your Bureau, why? Is that not possible to determine it jointly with sub-cities? 3. How do you see the revenue collection performance of Bole sub-city sub-cities? 4. Why did the revenue collection mandate given to ERCA? 5. How about the revenue collection performance of ERCA Bole sub-city branch office? 6. Is the current revenue sharing scheme or formula enhancing competition among subcities? And does it promote development and change? 7. Do the revenue sharing formula elements help to objectively distribute revenues of the city among sub-cities? 8. Do you think the revenue sharing formula motivate sub-cities in their revenue collection commitment and provide incentives? 9. In your opinion, is revenue sharing formula approach the optimal solution to efficiently distribute public money among sub-cities and does it motivate sub-cities or encourage their tax collection effort. 10. Don’t you think that the annual revenue collection plan provided to sub-cities is unattainable? 11. Since the revenue of a sub-city is absolutely dependent on city administration (i.e. has no own source revenue), how can it be accountable to its constituents? C. Intergovernmental transfer 1. What is the very purpose and objective of intergovernmental transfer/grant in the city’s fiscal system? IV 2. How do you see sub-city’s dependence on intergovernmental transfer and their revenue collection effort? 3. Among different forms of intergovernmental transfer which form/s does the city administration apply in the allocation of city financial resources to sub-cities & why? D. Borrowing 1. Would you please tell me why sub-cities are not allowed to engage in borrowing activities? III. Interview questions to ERCA Bole sub-city small taxpayers branch office 1. Could you please tell me your office’s mandate and to whom you’re accountable and reporting? 2. Is there any specific time frame that limits your revenue collection mandate? 3. What is the role Bole sub-city and woreda administrations in discharging your responsibilities? Are you working in collaboration with them? 4. Who sets the annual revenue collection plans? 5. How do you evaluate the revenue potential of the sub-city and your office’s collection performance? 6. How about your office’s revenue collection capacity and effort? And is there any incentive scheme? 7. Bole sub-city overall annual revenue collection made within its boundary since your engagement in tax and tax related revenue collections has shown remarkable improvement. What do you think is the main reason? 8. Are you satisfied with what your office has done so far? V Appendix II Questionnaire A Addis Ababa University College of Business and Economics Department of Public Administration and Development Management Research on Fiscal decentralization in Addis Ababa city administration, the case of Bole sub-city Questionnaire to be filled by sample respondents from Bole sub-city sector offices and woreda level sector offices administered under the sub-city. Dear respondents, This research is being conducted in partial fulfillment of the requirements for the Degree of Masters in Public Management and Policy (MPMP) at the Addis Ababa University, College of Business and Economics, Department of public administration and Development Management. I would be very grateful if you could take a few minutes to fill this questionnaire and I assure you that your responses will be treated and kept in a strict confidentiality and will not be used other than the intended academic research purpose. The very purpose of this questionnaire is thus to thoroughly study and understand the actual practice of fiscal decentralization in Bole sub-city and to see how the devolved fiscal power functions to enhance the intended outcomes of fiscal decentralization in the sub-city. On the basis of your responses, the research will provide policy recommendations that will help to improve the quality as well as the quantity of public service provisions within the sub-city and improve the revenue collection and the overall revenue allocation to the sub-city. General Directions; 1. You are not expected to write your name in any of the pages, 2. Please go through all the questions provided, 3. Please circle the appropriate number that best describes your response and 4. Write on the blank spaces provided for items specified as “please specify”. I (the researcher) appreciate in advance your cooperation. VI Please indicate your choice by marking a circle to a number fitting to your answer and/or writing in the space provided. A. GENERAL Q_1. Works at 1. Bole sub-city please specify your sector office _________________________________ ___________________________________________________________. 2. Woreda please specify your woreda and sector office _________________________ ___________________________________________________________. Q_2. Sex 1. Male 2. Female Q_3. Age 1. Under 28 years 2. From 28 to 35 years 3. 4. Over 45 years From 36 to 45 years Q_4. Qualification 1. PhD 2. MA/Msc 3. BA/BSc 4. College Diploma Other, please specify _________________________________________________ Q_5. Department/Section Please specify ____________________________________________________________ Q_6. Total service years in your current sector office 1. Under 1 year 2. 1 to 3 years 3. 3 to 5 years 4. Above 5 years Q_7. Current position Please specify ____________________________________________________________ VII B. EXPENDITURE RESPONSIBILITY Q_8. What criteria do you follow to formulate your annual budget requirements, and who sets those criteria elements? Please specify; _________________________________________________________________ _____________________________________________________________________________ Q_9. Are you free to determine the quantity as well as quality of your offices’ public service provision without any higher level government pressure or limitation? 1. Yes 2. To some extent 3. No 4. Don’t know Q_10. If your answer to the previous question is “yes”, could you please specify those pressures and limitations? Specify:_______________________________________________________________________ ___________________________________________________________________________ ____________________________________________________________________________. Q_11. What do you say about the annual budget preparation procedure you annually received from the city BoFED or sub-city office of finance? (i.e. are there too many restrictions?) Please specify: _________________________________________________________________ _____________________________________________________________________________ ____________________________________________________________________________. Q_12. What do you say about the “budget ceiling” provide by the city/sub-city office of finance upon budget calling and its impact on the quantity and quality of your offices’ service provision? Please specify; _________________________________________________________________ ____________________________________________________________________________. Q_13. Your annual budget requirement is 100% covered through the budget allocated by the city government, is there any impact on your office service delivery plan and actual provision? Please specify your opinion; ______________________________________________________ _____________________________________________________________________________ Q_14. How do you see your offices’ public service delivery performance relative to the residents demand both in quantity and quality? 1. Excellent 2. Very good 3. Good 4. Fair 5. poor Q_15. If your answer to the previous question is below good, what do you think were the reasons for such performance? And what should be done? Please specify; _________________________________________________________________ _____________________________________________________________________________. What should be done: ____________________________________________________________ _____________________________________________________________________________. VIII C. REVENUE RESPONSIBILITY Q_16. If your office is responsible to collect some kind of revenues, what are those revenue (tax and/or non tax) sources? Please specify; _________________________________________________________________ ______________________________________________________________________________ Q_17. Who determines or decides your annual revenue collection plans? Please specify; _________________________________________________________________ _____________________________________________________________________________ Q_18. How do you see your previous year annual revenue collection performance relative to your sub-city or Woreda economic/taxable potential? 1. Excellent 2. Very good 3. Good 4. Fair 5. poor Q_19. If your answer to the previous question is below very good, what do you think were the reasons for such unsatisfactory revenue collection performance? Please specify; _________________________________________________________________ _____________________________________________________________________________. Q_20. Is there any significant incentive/reward or motivational scheme to acknowledge and reward your revenue collection effort? 1. Yes 2. No Q_21. If “yes”, have you ever benefited from the scheme or incentive? 1. Yes 2. No Q_22. If you were not benefited from the incentive scheme what was the reason? Please specify; _________________________________________________________________ _____________________________________________________________________________. Q_23. What do you expect, if the sub-city allowed to directly utilizing the revenue generated or collected within its own boundary, and its impact on quality as well as quantity of public service provisions? I expect; ______________________________________________________________________ _____________________________________________________________________________. Its impact; _____________________________________________________________________ _____________________________________________________________________________. IX D. INTERGOVERNMENTAL TRANSFER Q_24. What type of intergovernmental transfer/grant you receive from the city government or the sub-city to cover your annual budget? 1. Specific grant 2. Block grant 3. A combination of both grants 4. Don’t know Q_25. Do you agree with the current fiscal policy, that the overall sub-city and Woreda budgets should be 100% financed via intergovernmental transfer? 1. Strongly agree 3. Disagree 2. Agree 5. Strongly disagree 3. Somewhat agree Q_26. If your response to the previous question is below “somewhat agree” what alternative measure do you suggest? Please specify; _________________________________________________________________ _____________________________________________________________________________. Q_27. How do you see your budget dependence on intergovernmental transfer in particular in determining the quantity as well as quality of your offices’ public service delivery/provisions? Please specify; ________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________. THANK YOU AGAIN FOR YOUR ASSISTANCE! X Appendix III Questionnaire B Addis Ababa University College of Business and Economics Department of Public Administration and Development Management Research on Fiscal decentralization in Addis Ababa city administration, the case of Bole sub-city Questionnaire to be filled by respondents from Bole sub-city and woreda level Finance and Economic Development Offices. Dear respondents, This research is being conducted in partial fulfillment of the requirements for the Degree of Masters in Public Management and Policy (MPMP) at the Addis Ababa University, College of Business and Economics, Department of public administration and Development Management. I would be very grateful if you could take a few minutes to fill this questionnaire and I assure you that your responses will be treated and kept in a strict confidentiality and will not be used other than the intended academic research purpose. The very purpose of this questionnaire is thus to thoroughly study and understand the actual practice of fiscal decentralization in Bole sub-city and to see how the devolved fiscal power functions to enhance the intended outcomes of fiscal decentralization in the sub-city. On the basis of your responses, the research will provide policy recommendations that will help to improve the quality as well as the quantity of public service provisions within the sub-city and improve the revenue collection and the overall revenue allocation to the sub-city. General Directions; 5. You are not expected to write your name in any of the pages, 6. Please go through all the questions provided, 7. Please circle the appropriate number that best describes your response and 8. Write on the blank spaces provided for items specified as “please specify”. I (the researcher) appreciate in advance your cooperation. XI Please indicate your choice by marking a circle to a number fitting to your answer and/or writing in the space provided. E. GENERAL Q_1. Works at 3. Bole sub-city please specify your sector office _________________________________ ___________________________________________________________. 4. Woreda please specify your woreda and sector office _________________________ ___________________________________________________________. Q_2. Sex 2. Male 2. Female Q_3. Age 2. Under 28 years 2. From 28 to 35 years 3. 4. Over 45 years From 36 to 45 years Q_4. Qualification 2. PhD 2. MA/Msc 3. BA/BSc 4. College Diploma Other, please specify _________________________________________________ Q_5. Department/Section Please specify ____________________________________________________________ Q_6. Total service years in your current sector office 2. Under 1 year 2. 1 to 3 years 3. 3 to 5 years 4. Above 5 years Q_7. Current position Please specify ____________________________________________________________ XII F. EXPENDITURE RESPONSIBILITY Q_8. What criteria do you follow to formulate your annual budget requirements, and who sets those criteria elements? Please specify; _________________________________________________________________ _____________________________________________________________________________ Q_9. Are you free to determine the quantity as well as quality of public services delivery without any higher level government pressure or limitation? 2. Yes 2. No Q_10. If your answer to the previous question is “yes”, could you please specify those pressures and limitations? Specify:_______________________________________________________________________ ___________________________________________________________________________ ____________________________________________________________________________. Q_11. What do you say about the annual budget preparation procedure you annually received from the city BoFED? (i.e. are there too many restrictions?) Please specify: _________________________________________________________________ _____________________________________________________________________________ ____________________________________________________________________________. Q_12. What is your opinion on the “budget ceiling” provide by the city government upon budget calling and its impact on your annual budget formulation? Please specify; _________________________________________________________________ ____________________________________________________________________________. Q_13. Your annual budget requirement is 100% covered through the budget allocated by the city government, what is your opinion? Please specify your opinion; ______________________________________________________ _____________________________________________________________________________ XIII G. REVENUE RESPONSIBILITY Q_14. What are your sub-city’s or woreda’s sources of revenue? Please specify; _________________________________________________________________ _____________________________________________________________________________. Q_15. What are the revenue (tax and non tax) sources your sub-city/woreda is responsible to collect? Please specify; _________________________________________________________________ ______________________________________________________________________________ Q_16. Who determines or decides your annual revenue collection plans? Please specify; _________________________________________________________________ _____________________________________________________________________________ Q_17. How do you see your previous annual revenue collection performance relative to your subcity or woreda economic/taxable potential? 2. Excellent 2. Very good 3. Good 4. Fair 5. poor Q_18. If your answer to the previous question is below very good, what do you think were the reasons for such poor revenue collection performance? Please specify; _________________________________________________________________ _____________________________________________________________________________. Q_19. Is there any significant incentive/reward or motivational scheme to acknowledge and reward your revenue collection effort? 2. Yes 2. No Q_20. If “yes”, have you ever benefited from the scheme or incentive? 3. Yes 2. No Q_21. If you were not benefited from the incentive scheme what was the reason? Please specify; _________________________________________________________________ _____________________________________________________________________________. Q_22. To what extent do you help and/or collaborate with ERCA Bole sub-city branch office personnel to increase the revenue collections within your administrative boundary? 1. To greater extent 2. To Some extent 3. Very minimal 4. Not at all 5.dont know XIV Q_23. If your response to the previous question is below “to some extent”, what was the reason? Please specify: _________________________________________________________________ _____________________________________________________________________________. Q_24. Does revenue allocation through formula actually serve the objective of ‘ensuring competition among sub-cites’? 1. Yes 2. No Q_25. If “No”, why? Please specify; _________________________________________________________________ _____________________________________________________________________________. Q_26. How do you see elements of the budget allocation formula in determining your sub-city overall annual budget? 1. Highly acceptable 4. Somewhat unacceptable 2. Somewhat acceptable 5. Highly unacceptable 3. No comment 6. Don’t know Q_27. If your response is below somewhat acceptable lease specify your reasons Please specify; _________________________________________________________________ _____________________________________________________________________________. Q_29. What do you expect, if the sub-city allowed to directly utilizing the revenue generated or collected within its own boundary, and its impact on revenue collection and quality as well as quantity of public service provisions? I expect; ______________________________________________________________________ _____________________________________________________________________________. Its impact; _____________________________________________________________________ _____________________________________________________________________________. XV H. INTERGOVERNMENTAL TRANSFER Q_33. What type of intergovernmental transfer/grant you receive from the city government to cover your annual budget? 4. Specific grant 4. A combination of both grants 2. Block grant 4. Don’t know Q_31. Would you please list down those specific grants or budgets allocated to your sub-city or woreda sector offices? 1. Specific grant: __________________________________________________________ _____________________________________________________________________________ Q_32. Do you agree with the current fiscal policy that the overall sub-city, sector and Woreda offices’ budget should be 100% financed via intergovernmental transfer? 2. Strongly agree 5. Disagree 2. Agree 5. Strongly disagree 3. Somewhat agree Q_33. If your response to the previous question is below “somewhat agree” what alternative measure do you suggest? Please specify; _________________________________________________________________ _____________________________________________________________________________. Q_34. How do you see your budget dependence on intergovernmental transfer in particular in determining your quantity as well as quality of public service delivery/provisions? Please specify; ________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________. THANK YOU AGAIN FOR YOUR ASSISTANCE! XVI