Municipal Decentralization in Ethiopia: A Rapid Assessment

Transcription

1 Draft for discussion and comments Municipal Decentralization in Ethiopia: A Rapid Assessment July 17, 2001 AFTU1

2 Table of Contents Municipal Decentralization in Ethiopia: A Rapid Assessment Sub-National Restructuring Processes The Emerging Role of Municipalities Steps Towards Municipal Reform in Ethiopia Overview of Municipal Status, Legal and Institutional Framework Urbanization and Municipal Status Legal Basis of Municipalities Municipal Institutional Framework Municipal Functions and Current Performance: Insights from Four Case Studies Municipal Functions and Management Municipal Revenue Sources and Management Municipal Expenditures Municipal Budgeting Process Staffing, Human Resource Capacity and Salary Levels Governance Issues Moving Forward: A Process for Strengthening Municipalities...26 This report was prepared by a team comprising of Sumila Gulyani (Task Leader), David De Groot, Yitbarek Tessema, Meheret Ayenew and Genevieve Connors. The field work, led by Meheret Ayenew, was conducted during February-May ET-Municipality_Study-July01 2

3 Municipal Decentralization in Ethiopia: A Rapid Assessment The 1995 Constitution of Ethiopia instituted radical reform of governance structures, including devolution of significant resources and responsibilities from central agencies to nine regional administrations. An explicit goal of the new constitution is to bring government closer to the people through a process of decentralization intended to increase public participation and responsiveness to local needs. A corollary goal is to ensure that Ethiopia s hundreds of identified ethnic groups are formally represented in the country s political and resource allocation processes. GOE faces an enormous task in dismantling the highly centralized, unrepresentative structures created over 20 years by the Derg regime and replacing them with new, responsive structures that provide adequate political voice for all stakeholders and promote growth through the provision of necessary public goods. In many respects, Ethiopia s decentralization process faces a unique set of challenges, balancing reform, representation and growth goals within a framework of national reconstruction. The inherent complexity and importance of the country s decentralization process led GOE and the World Bank, in mid-2000, to reassess the Bank s support in the provision of sustainable local infrastructure and services required for growth. In particular, the reemergence of municipal administrations within the sub-national governance system of the country requires that GOE and the Bank rethink their partnership to establish clear priorities for assistance. In this light, the Bank commissioned consultants to prepare a rapid assessment of the status of decentralization particularly at the sub-national level and focused upon the potential role of municipalities as effective growth facilitators. That research, presented in four papers: (a) provides direct evidence of the growing need for municipal capacity building in Ethiopia, and (b) identifies specific areas requiring assistance. The purpose of this paper is to summarize the results of this assessment, relate it to other analytical work, and outline a revised strategic approach to assistance at the subnational/municipal level. This paper builds on the general understanding of municipalities presented in the Ethiopia Regionalization Study (1999) and takes a closer look at the ways in which municipalities in Ethiopia are actually functioning. Using case studies of four towns in four different regions Bahir Dar in Amhara, Awassa in the Southern region, Gambella town in Gambella region and Dire Dawa city it highlights some of the key issues and opportunities for improving municipal capacity and performance in Ethiopia. 1 The paper is structured as follows. Section 1 provides an overview of the sub-national restructuring process, the emerging role of the municipalities, and the steps that have been taken 1 The rationale for the selection of these regions was to include: (i) two strong regions (Amhara because of advanced efforts in municipal reform, and the Southern region because of its special nature as a region having nearly fifty ethnic groups); (ii) two weak regions (Gambella and Benshangul Gumuz because these regions were not included in the woreda decentralization study); (iii) Dire Dawa the second biggest city, after Addis Ababa which is treated as one special region/city. Background papers are available on each of these municipalities. (This report relies on case studies of four municipalities and does not discuss Benshangul Gumuz s Assosa municipality because the background report and data came in later). ET-Municipality_Study-July01 3

4 towards municipal reform. Section 2 briefly summarizes the historical and current legal and institutional framework for municipalities. Section 3 analyses the functions and fiscal performance of municipalities, using data from four towns. Specifically, it examines the functions, revenues and expenditures in the four towns in detail, to identify some of the issues in improving the fiscal and service delivery performance of municipalities more generally. It also discusses the budgeting process, human resource capacity and salary levels, and governance issues in these four municipalities, to provide a better understanding of some of the institutional and governance issues mentioned earlier in Section 2. Section 4 outlines a phased strategy of assistance for discussion with GOE. 1. Sub-National Restructuring Processes 1.1 The Emerging Role of Municipalities Since the enactment of the 1995 Constitution, GOE has focused its decentralization efforts mainly on devolution of responsibilities and resources to the nine regions. Each region has been empowered to establish systems of deconcentrated sub-regional structures including zones, woredas and kebeles. Given the high degree of centralization under the previous regime, the regional reform processes have understandably taken time and effort, especially in light of the capacity constraints that typify the Ethiopian public sector. By 2000, it was becoming increasingly clear to a number of regional administrations that establishment of only deconcentrated regional structures would not be adequate to serve the needs of rapidly growing urban centers and the rural hinterlands these centers must support. Therefore, several regions have now turned their attention to reviving municipal administrations (see discussion of previous municipal status below) that would assume major responsibilities for raising own-source revenues to provide and maintain basic services. A key objective of this municipal revival is to mobilize additional own-source revenue and capacity to address the needs of cities and towns, thus freeing regional resources to focus on rural development priorities. However, to achieve this objective each region must: (a) reform the legislative and intergovernmental fiscal systems through which municipalities will function, and (b) rebuild all aspects of municipal capacity to carry out local authority mandates. The emerging role of municipalities in Ethiopia s comprehensive development framework is potentially enormous. GOE s strategy is focused on the Agricultural Development Led Industrialization (ADLI) initiative. Briefly, this initiative seeks to improve the productivity of rural areas through key investments in critical infrastructure linkages. International experience has shown that initiatives such as ADLI will have a greater degree of impact if rural investments are linked to cities and towns that provide market access, services and private investment opportunities. In addition to improving rural-urban linkages, the revival of municipal administrations in Ethiopia is required to meet the demands resulting from a very rapid rate of rural to urban migration and an overall urbanization rate estimated at almost 6% per annum (see below). As in the rest of the Sub-Saharan region, rapid urbanization can be expected to continue in Ethiopia for ET-Municipality_Study-July01 4

5 the foreseeable future, as will the rapid growth of diverse and increasingly complex human settlements. 2 One effect of the long-lasting marginalization of municipal governments is that, unlike other countries in the region, there are very few experienced city managers in Ethiopia, and there is understandably little experience among local and political leaders with the principles and policies required for success in this regard. Therefore, as borne out by the results of the study summarized below, rebuilding capacity to effectively manage the nearly 900 cities and towns in Ethiopia will be a critical precursor to linkages required for growth. 1.2 Steps Towards Municipal Reform in Ethiopia The government s growing commitment towards strengthening municipalities is evident from the following developments. First, in its second five plan, the current government has emphasized the importance of urban development and recognized the critical role that municipalities can play in this process. Specifically, the Plan for Development, Peace and Democracy states that: The goals of our program with regard to urban development are to increase and strengthen the contribution of urban areas towards the overall economic and social development of our country and to improve the living standards of the urban population. Efforts shall be made to alleviate financial problems which have become the main hindrance to our project of urban development. Laws shall be promulgated to fix municipal taxes with the view to improving the financial standing of urban centers, on the basis of which also the centers shall be encouraged to mobilize their inhabitants and enhance their capacity to collect taxes and use the revenue thus generated for their development. Second, the Federal Ministry of Works and Urban Development (MWUD) has prepared draft legislation for strengthening the status of municipalities and building their capacity. This proposed legislation has been sent to the regional governments for review, and it will be revised and submitted to the Parliament for approval. Third, and more importantly, the regions have been moving ahead with the task of legally recognizing and formalizing municipalities as autonomous authorities. Several regions have initiated preparatory studies as a first step towards drafting state legislation that will redefine municipal roles and status. Some regions are working on specific tasks such as the development of municipal classification systems and revision of municipal tax bases and rates. This work is at different stages of progress in the four large regions. Oromia and Amhara are the furthest ahead they issued proclamations (legal notices) establishing and redefining the powers and duties of their municipalities in 1999 and 2000, respectively. In the Southern region, the preparatory studies have been completed and the proclamation is under preparation. The Tigray region has started preparatory work with assistance from UDSS/GTZ. 2 The UN estimates that the number of cities with more than 20,000 inhabitants will increase by 289% to almost 3000 by See J.L. Venard, Urban Planning and Environment in Sub-Saharan Africa, UNCED Paper no. 5 (AFTES), ET-Municipality_Study-July01 5

6 Fourth, the MWUD has been delivering important and useful assistance through its Urban Development Support Services (UDSS) unit to enhance the financial and managerial capacity of municipalities through system development and on-the-job training. Both the World Bank and GTZ have provided substantial support for this essential work. This support is expected to increase significantly, in particular in the area of local government capacity building, and other donors may get involved as well. The development of regulations in some states and the research supporting them can provide lessons and examples for other states on regularizing the status of municipalities and providing them with a structure and procedures more conducive to good performance. Major reforms, however, do not happen overnight, especially where municipal capacity is weak, expectations of municipalities are low, and local resources are limited. A strategy for moving forward in Ethiopia is outlined in the last section of this paper. Before that, we turn to a more detailed analysis of the history, current status and fiscal performance of Ethiopian municipalities. 2. Overview of Municipal Status, Legal and Institutional Framework This section provides an overview of the nature and size of municipalities in country and the legal and institutional framework within which they work. It shows that the key issue to be resolved in the process of enacting new municipal legislation and the guidelines for their implementation is to clarify the position of municipalities in the general framework of decentralized governance that is, the legal, functional and financial relationship of the municipalities to the woreda, zonal and regional governments Urbanization and Municipal Status 3 According to the 1994 Census, there are 855 urban centers 4 in the country, accounting for 13.7 percent (8.2 million of 54.9 million) of Ethiopia s population. 5 The majority of the urban centers are concentrated in four regions, Oromiya (373), Amhara (208), SNNP (149) and Tigray (74), while the most urbanized regions (in terms of population) are Addis Ababa (98%), Dire Dawa (66%), Harari (58%), and Tigray, Oromiya, and Gambella (each with 15%). Addis Ababa counts as only one urban center, but its population exceeds two million and it has special status as a city government. 6 Among the four regions with the largest number of urban centers, 372 of the 804 urban centers are classified as townships and, of these, 250 are officially recognized as municipalities. Only 41 municipalities have a population greater than 20,000, and in just two cases (Bahir Dar in Amhara Region, which has been given special zonal status, and 3 Sections 2.1, 2.2 and 2.3 on the municipal status, legal basis, and institutional framework draw significantly from the Ethiopia Regionalization Study, Report No ET, World Bank, June 15, An urban center is defined by the Central Statistical Authority as a settlement with: (a) a minimum population of 1000, at least 50 percent of whom are engaged in non-agricultural activities; (b) existing urban dwellers associations (UDAs), grassroots organizations defined by Proclamation No. 104 of 1976; and (c) status as a seat of government administration at least at the woreda level. 5 The total figure does not include the Somali Region. 6 This status was granted by Proclamation No. 87 of 1997 of the Federal Democratic Republic of Ethiopia. ET-Municipality_Study-July01 6

7 Nazreth in Oromiya Region) does the population exceed 100,000. Outside the four regions containing the majority of urban centers, only Dire Dawa, a special administrative region, has an urban population greater than 100,000. Thus, most of Ethiopia s urban centers support small but rapidly growing urban populations, and they often serve as service and market centers for rural areas, especially for farming communities. Ethiopia is among the most rapidly urbanizing countries in Africa and, perhaps, in the developing world as a whole. 7 For example, the growth rate of its urban population in the period between was 4.8 per cent per annum. This figure increased to 5.8 per cent per annum between According to the 1994 Population and Housing Census, the growth has been much higher for some intermediate towns Asayaita (6.5%), Assossa 9.9%), Gambella (15%), and Jijiga (9.1%). The rapid growth of the urban population has placed tremendous pressure on the management capacity of municipalities for service delivery and local economic development. The major contributing factors for urban growth in the cities are found to be the relatively higher natural growth of population in the centres and the increasing rural to urban migration 2.2 Legal Basis of Municipalities 8 Under the highly centralized Derg regime, Ethiopia s municipalities were marginalized and did not function as independent local authorities. As a result, GOE s current efforts to revive the countries municipalities involves a two-step process legislative reenactment followed by extensive capacity building and reform. The major laws pertaining to municipalities are delineated below. Most of the major legislation governing municipalities dates back to the Imperial Administration. A 1932 decree assigned a few basic services to Addis Ababa and provided for the taxation of urban land. Decree No. 1 of 1942 allowed for the creation of municipalities with appointed councils under the control of the Ministry of the Interior, and it also defined some basic municipal functions and revenue sources. Further elaboration of municipal functions and central control mechanisms was provided in Proclamation No. 74 of Legal notices pursuant to this proclamation were issued in 1971 to refine and update regulations on municipal taxes, fees and dues. In many municipalities, the 1971 regulations continue to be used as the principal basis for municipal revenue generation. The Derg issued three major proclamations that affected the organization and management of municipalities. Proclamation No. 47 of 1975 nationalized urban land, and Proclamation No. 4 of 1976 provided for the creation of various levels of urban dwellers associations that supported the Derg s philosophy of governance. Proclamation No. 206 of 1981 essentially turned over the administration of municipalities and urban centers to the urban dwellers associations, but this was done in the context of heavy centralized regulation and control. 7 African Development Indicators, More detail is provided in: Sisay Ashenafi (1996), Legal and Institutional Aspects of Municipal Administration in Ethiopia, prepared for Urban Development Support Services, Ministry of Works and Urban Development, Addis Ababa. ET-Municipality_Study-July01 7

8 After the fall of the Derg in 1991, the Transitional Government of Ethiopia embarked on a wideranging process of decentralization. The government structure framed in the 1995 Constitution focuses on the development of regional governments and woredas. There is no mention of the municipalities in the Constitution or in the main Government proclamations defining the structure and responsibilities of decentralized entities. 9 The present Government has issued three proclamations directly relevant to municipalities and urban areas. Proclamations No. 41 of 1991 and No. 4 of 1995 gave the Ministry of Works and Urban Development broad powers and duties for urban development and assigned key responsibilities for municipalities to regional governments. Proclamation No. 87 of 1997 chartered Addis Ababa as a city government and defined in detail its organization and functions. Much of the recent legislation and preparatory action pertaining to municipalities has been at the regional level. Oromia and Amhara are two regions that have legally established their municipalities. Specifically, Oromia has issued regional proclamation no. 26/1999 providing for the establishment of urban administrations. Amhara has issued regional proclamation no. 43/2000 to provide for the establishment, reorganization and definition of powers and duties of the municipalities in its jurisdiction Municipal Institutional Framework 10 The institutional framework in which municipalities currently function is complex, ambiguously defined at all levels of government, and inconsistent across regions. As might be expected from the legal framework summarized above, the role of municipalities in the decentralization efforts is particularly unclear. Even the Regional Affairs Department in the Office of the Prime Minister, which has substantial overall responsibility for the decentralization process, has no formal link to municipalities. The Federal Ministry of Works and Urban Development (MWUD) formerly had substantial responsibilities for municipalities, but new regulations assign them only a few major related tasks. MWUD is expected to undertake studies related to broad urbanization patterns, to provide an environment conducive to urban development (including the development of appropriate training), and to define standards for the classification of urban centers. The National Urban Planning Institute (NUPI), which is under MWUD, has been heavily involved in preparing urban physical development plans, and they are likely to continue to play some role in this area because of poor local and regional capacity. 9 Proclamation No. 7 of 1992 To Provide for the Establishment of National/Regional Self-Governments; Proclamation No. 33 of 1992 To Define the Sharing of Revenue Between the Central Government and the National/Regional Self-Governments; Proclamation No. 41 of 1993 To Define the Powers and Duties of Central and Regional Executive Organs of the Transitional Government of Ethiopia. 10 More detail is provided in Ashenafi (1996), and in Gebhard von Katte, Sisay Ashenafi and Shewaye Tesfaye (1996), Report of the Reconnaissance Mission on the Approaches to and Problems of Urban Management and on the Legal and Institutional Framework of Municipalities, Urban Development Support Services, Ministry of Works and Urban Development, Addis Ababa. ET-Municipality_Study-July01 8

9 The Urban Development Support Services unit of MWUD is a key institution in the area of municipal development and capacity building. With support from the World Bank (Market Towns Development Project) and GTZ (Urban Management and Capacity Enhancing Project), UDSS has been developing on-site training in general and financial management in selected municipalities. In addition, it has been assisting with preparatory studies in a number of regions (e.g. Amhara, Oromiya, Tigray) to help clarify the status of municipalities and to undertake specific technical assistance tasks designed to improve municipal performance. For example, UDSS/GTZ are currently assisting the regions in implementing pilot cadastral projects in selected municipalities and facilitating implementation of the municipal proclamations where issued. It is also preparing to help in the development of Municipal Management Systems (MMS) for selected municipalities. As a federal focal institute in the country for municipal development, it has prepared a national seminar on Municipal Management Capacity that covers all regions. It has played a key role in the development of the National Urban Management Capacity Building proposal, which has been submitted to the Prime Minister s office for inclusion in the broader National Capacity Building Program. More substantial responsibility for municipalities rests with the regional governments and almost all of the action has been taking place at this level. There are two key players at this level. First and most important are the regional councils, which have administrative responsibility for all government entities within their jurisdiction, including the municipalities. In practice, municipalities may be required to report to lower levels within the regional administration, that is, the zone or the woreda, rather than to the regional council. The second major actor at the regional level is the Bureau of Works and Urban Development (BWUD), which is directly responsible to the regional council and is intended to have subsidiary departments organized at the level of zone administration. These agencies are formally in charge of technical matters related to urban development, including in non-chartered municipalities. Although their technical and supervisory mandate is broad, covering preparation and implementation of physical plans, budget administration, revenue collection and personnel administration, in practice they have focused primarily on activities related to project design and implementation. In addition, not all of the regions have zonal departments, and in a few cases, the regional BWUD have additional responsibilities for the mining and energy sectors. At the local level there are four critical institutional and governance issues that need to be addressed. First, many urban centers are not designated as municipalities, depriving them of municipal responsibilities and sources of revenue. Although there have been some standards for categorizing municipalities since MWUD issued them under the Derg in 1988, their application to ensure consistent treatment of municipalities in terms of responsibilities, structure and staffing has been inconsistent. Second, substantial variations in lines of upward accountability hinder the development of an integrated system of government. Some municipalities report primarily to the regional BWUD, a technical agency, while others report to zonal or regional councils. Third, there is a lack of clarity in the relationship between elected municipal representatives and appointed members of the municipal staff. This can lead to disagreements and misunderstandings that slow down and/or damage municipal performance. Fourth, there is, at least in some cases, substantial interference in municipal affairs by the regional BWUD and/or higher levels of administration. This can occur in the form of payment authorizations, ET-Municipality_Study-July01 9

10 restrictions on the use of legally allowable municipal revenue sources, appropriation of municipal responsibilities and/or property, etc. 11 Such interference not only undermines local autonomy, but also constrains the development of municipal capacity. (For a more empirical discussion see section 3.6). 3. Municipal Functions and Current Performance: Insights from Four Case Studies This section uses detailed data from four municipalities Bahir Dar, Awassa, Gambella and Dire Dawa to examine the following issues: the appropriateness of the functions and revenue sources assigned to municipalities, municipal performance on the revenue side (total collections, collection efficiency and arrears), and key issues on the expenditure side (expenditure levels and constraints, capital versus recurrent expenditures, and the wage bill). The later part of the section briefly discusses some of the institutional and governance arrangements in these four municipalities to identify issues that affect municipal performance and autonomy more generally. 3.1 Municipal Functions and Management The major responsibilities of municipalities were defined in Proclamation No. 74 of 1945 and Proclamation No. 206 of 1981, discussed above. More recently, regional governments have been reviewing municipal roles and introducing new legislation on the functions of municipalities in their jurisdictions. Allowable municipal functions (subject to appropriate regional approval) include: Preparation of budget proposals Assessment and collection of allowable municipal revenues Preparation and implementation of development plans Provision of internal roads and bridges Provision of markets, slaughter houses, terminals, public gardens, recreational areas, and other public facilities Regulation of cleanliness and provision of solid waste, water, sewerage and drainage services Delivery of miscellaneous services, including fire protection, libraries, public toilets, street lighting, nursery schools, ambulance services, etc. Noticeably absent from this list are services that involve major interjurisdictional externalities or those that have important distributional implications, such as health, education, major roads, etc. The list also excludes electricity, telecommunications and postal services these are provided by central government agencies. 11 Shewaye Tesfaye and Tigist Negash (1995), An Assessment of Municipal Financial Management in Southern Region, Financial Management Support Services, Urban Development Support Services, Ministry of Works and Urban Development, Addis Ababa. ET-Municipality_Study-July01 10

11 The assignment of functions to municipalities in Ethiopia appears to be generally appropriate both conceptually and relative to common international practice. In reality, however, Ethiopian municipalities rarely cover this full range of functions or adequately deliver those services for which they do take responsibility. 12 For example, water supply is often categorized as a municipal function but is usually provided by zonal authorities. Table 1 shows the services provided by the municipality in four sample towns. Service provision at the municipal level is limited both the coverage and level of service provided are low. The municipality takes responsibility for a wider range of services and functions in the larger towns (Bahir Dar and Dire Dawa) as compared to the smaller ones (Gambella and Awassa). In some cases, services that are not provided by the municipality are provided by other levels of government (e.g. the zone or the woreda). Often, however, lack of delivery of services by the municipality simply means that there is no provision of certain critical services. In Gambella, for example, there is no provision (public or private) of urban transport no buses, no taxis, and no other alternatives. Table 1. Municipal Functions and Service Provision in Four Towns Type of service Bahir Dar Awassa Gambella Dire Dawa Urban land management & services Central markets and shops Abattoirs Waste removal/ garbage collection Urban hygiene and sanitation Cemeteries Urban/city transportation Recreation/parks Street lighting Fire protection Road construction Issuance of marriage & birth certificates No No No No No No No No No No No No Note: Status as of June These functions are likely to change as the various regions move forward with their programs to strengthen municipalities. For example, in Gambella town a new draft law (2001) makes the municipality responsible for provision many of the services that it is currently not providing, including street lighting, issuance of marriage and birth certificates, fire protection etc. 12 Shewaye Tesfaye (1997), Performance and Financial Capacities of Municipalities in Ethiopia, prepared for a Workshop on Urban Management and Local Economic Development, Institute of Housing and Urban Development Studies, Rotterdam, pp and pp ET-Municipality_Study-July01 11

12 Table 2. Municipal Revenue in Four Towns: Average Annual Revenue Collected (1997/ /00) Bahir Dar Gambella Awassa Dire Dawa 000s Birr % Own 000s Birr % Own 000s Birr % Own 000s Birr % Own Own Source Revenue A. Property Tax 6,014 62% 29 10% 2,615 56% 1,170 16% B. Business Tax 530 5% 71 25% % 510 7% C. Other Local Taxes 216 2% % 256 5% 2,936 40% D. Service Charges 768 8% 64 23% % % E. Rent/Sales of Municipal Property 629 7% 4 2% 38 1% 465 6% F.Commercial activities & other sources 1,481 15% 7 3% 61 1% 1,403 19% G. From AAHR 8 0% % - Total Own Source 9, % % 4, % 7, % External Finance Sources Regional Govt % % 14 1% - - ESRDF (Matching Grant) 8 0% % % - - Loan form Health Bureau % Federal Grants (Road Fund) 1,178 26% % % Other Federal Grants IDA through UDSS 2,834 63% - - 2,043 74% - - Total External Revenue 4, % % 2, % % Summary Total Revenue (000s Birr) 14, ,466 8,090 Own Source as % Total 68% 55% 63% 92% External as % of Total 32% 45% 37% 8% Population (1999) 175,910 23, , ,254 Per Capita Own Source Rev Birr (USD) 55 (7) 12 (2) 42 (5) 26 (3) Per Capita Total Revenue Birr (USD) 80 (10) 22 (3) 67 (8) 28 (4) Note: For data disaggregated by year, see Annex 2. ET-Municipality_Study-July01 12

13 3.2 Municipal Revenue Sources and Management The basic revenue sources of municipalities, defined primarily in Proclamation No. 74 of 1945, include: Property taxes collected in the form of land rents, lease income and building taxes Business income taxes Market fees (for stalls and use of markets) Fees for municipal services, including: sanitary services, slaughter houses, fire brigade services, mortuary and burial services, registration of births and marriages, building plan approval, property registration and surveying, and use of municipal equipment, transport or employees As in the case of assignment of functions, these are generally appropriate sources of revenue for municipalities, and some municipalities have received permission to levy various other types of local fees as well, such as goods entry taxes (similar to the Indian octroi) and vehicle loading or unloading fees. Again, however, the reality falls short of the model revenue generation at the municipal level is limited and plagued by several problems. The sub-sections below examine the key factors that determine the revenue generation potential of a municipality that is, the tax base, the tax rates, collection efficiency, enforcement, and the capacity of staff working on revenue administration. The discussion shows that there is considerable room for improvement in each of these areas. Main revenue sources and total collections An examination of the actual revenues of four municipalities over the three-year period 1997/98 to 1999/00, presented in Table 2, reveals the following. First, the absolute level of own-source revenues is extremely low. On average, the annual per capita revenue collected is US$2 in Gambella municipality, US$ 3 in Dire Dawa, US$5 in Awassa and US$7 in Bahir Dar. Even when external sources are included, municipal revenues per capita in these four towns is only US$3-10. These figures are significantly lower than the average per capita revenues of African municipalities (US$15 per capita) and dramatically lower than those in the Asia Pacific region (US$ 248 per capita) and the Latin America region (US$252 per capita). (Table 3 presents a comparison). Second, taxes on property and businesses are usually the two most important sources of municipal revenue, followed by service charges (Table 2). However, there is significant variation in the relative importance of these revenue sources across municipalities and it seems to be unrelated to differences in their relative resource bases. For example, property taxes are the most important sources of revenue in Bahir Dar and Awassa, accounting for 62% and 56% of the own-source revenues of the two towns respectively. By contrast, property taxes account for a mere 10% of the own-source revenues of Gambella municipality. The reason is that Bahir Dar and Awassa have revised their property tax rates at least once since 1995, while Gambella is relying on land and building tax rates established in Further, although the cadastral systems and records are extremely poor and outdated in almost all municipalities in Ethiopia, records in smaller towns such as Gambella are far worse than those in towns such Bahir Dar and Awassa, and this is reflected in the total collections from property taxes. ET-Municipality_Study-July01 13

14 Revenues from business taxes often the second most important revenue source after property taxes also vary widely across municipalities. In absolute terms, the revenue generated from business taxes is roughly similar in Bahir Dar and Awassa, but they account for 5% and 10% of the own-source revenues of these two towns, respectively. In Gambella, business taxes generate a fraction of the amount that they do in Bahir Dar and Awassa, but account for 25% of its small and undiversified revenue base. The contribution of services charges towards own-revenues ranges is about 8% in Bahir Dar, 13% on Dire Dawa, 21% in Awassa and 23% in Gambella. As the next section indicates, there appears to be significant potential for increasing the revenues generated from service charges by adjusting the user fees to reflect current costs and incomes and/or instituting changes, such as reducing the range of fees for a particular service, to make administration of the charges easier. Table 3. Municipal Per Capita Income and Expenditure in Various Towns and Regions (US$ per capita per year) Tariffs and fees for services Description Average per capita Average per capita income (US$) expenditure (US$) Bahir Dar 7 7 Awassa 5 3 Gambella 2 2 Dire-Dawa 3 2 Africa Arab States 1, Asia Pacific Industrialized 2,763 1,133 LAC * Transitional * All Source: Urban indicators (1998 and 2001), Habitat Coordination Office, MWUD; Dire - Dawa Finance Office (2001) Note: Average 1993 US $ persons/year; LAC: Latin American Countries; Transitional: Countries in transition Many municipalities in Ethiopia collect taxes and service charges based on rates and tariffs established in the 1970s. This means that the user charges and fees that are set in Birr are totally obsolete, have no relation to current incomes and costs, and generate little or no revenue (see Annex 1 for tariff levels in three municipalities). Since 1995, some municipalities have started the process of revising certain tax rates and tariffs but have rarely reviewed and rationalized all of them systematically. This is evident from the following examples. In Awassa, with exception of a change in the property tax regulation and rates in 1995, most of the tariffs date back to The story in Dire Dawa is somewhat similar most tariffs are based on a 1971 regulation, but the city has introduced some new taxes, adopted a new urban land leasehold policy in 1995, and issued new urban land lease regulations in January ET-Municipality_Study-July01 14

15 In Gambella town, the municipality modified its tariff rates in 1995, but the focus was on increasing the rate for trade licenses rather than on diversification through introduction of new sources. Further, the land and building tax regulation has remained unchanged since the issuance of legal notice no. 64 of The situation in Bahir Dar is different and somewhat better than in other towns. The municipality revised its property taxes in 1995 and most service tariffs in In 2000, municipal proclamation no. 43/2000 gave the municipality the authority to introduce new taxes and change existing tariffs (subject to regional approval). Apart from being outdated, the tariffs are often difficult to administer and/or inappropriate. For example, Gambella has several taxes and tariffs that generate little revenue, and there are others that have never been implemented because they proved difficult to administer. In Bahir Dar, the business license fee ranges from Birr ,000, depending on the business. However, the actual collections average only about Birr 317 per registered business and default rates are very high. 13 In such a situation, it would make sense to reduce the number of rates to make the tax administratively simpler, lower the average rate to reduce the incentive to default, and focus on improving compliance; together these measures are more likely to improve total revenues generated from the business license fee than an approach that involves raising taxes and tariffs further. Collection rates, arrears and enforcement One indicator of collection efficiency is the collection rate, that is, the actual collections compared to the billings or estimated collections. Data from four municipalities, presented in Table 4, indicates that the average collection rates are often low and they vary by municipality. Gambella collects, on average, only about 59% of its planned or estimated revenues. In Awassa and Bahir Dar the collection rates are somewhat better, averaging about 64% and 72%, respectively. With an average collection rate of 95%, Dire Dawa appears to be a stellar performer. A further analysis reveals, however, that its good performance is mostly due to a large increase in collections in 1999/00 which, in turn, is attributable to an increase in the chat tax 14 rate (from Birr 0.20/kg to Birr 1.0/kg) implemented that year. In the four-year period preceding the increase in the chat tax, Dire Dawa s average collection rate was 61%. In other words, there is considerable scope for improving the collection efficiency in Dire Dawa and in the other municipalities in the country. There is also considerable variation in the collection rate from year to year. Table 5 shows that the collection rate in Gambella has been declining over the last 2-3years it has fallen from 73% in 1997/98 to 51% in 1999/00. By contrast, the collection rate in Awassa shows an encouraging trend collections have improved from a level of 59% to 75% over the same period. In Bahir Dar and Dire Dawa the collection rates tend to fluctuate from year to year. These differences in 13 Put in the calculation and source here. 14 Chat is a narcotic green leaf. It is consumed widely in the region and is exported to Somalia, Djibouti and Yemen. The Chat tax is collected from businesses involved in its trade. ET-Municipality_Study-July01 15

16 performance across municipalities and especially the annual variation within a municipality are worth exploring, in follow-up work, to improve our understanding some of the variables affecting revenue performance. Table 4. Average Collection Rates over 1997/ /00 Own Revenue Planned (a) Actual (b) Collection rate (a/b) Bahir Dar 13,369 9,646 72% Awassa 7,297 4,697 64% Gambella % Dire Dawa 7,843 7,414 95% Table 5. Annual Variation in Collection Rates (1997/ /00) 1997/ / /00 Average Bahir Dar 86% 55% 76% 72% Awassa 59% 60% 75% 64% Gambella 73% 59% 51% 59% Dire Dawa 78% 57% 175% 95% Default rates and size of arrears The costs of weak collection performance become more evident in examining the arrears, that is, the gap between the amount of tax estimated or billed by the government and the amount paid by the taxpayers. Table 6 presents the arrears associated with two major revenue sources property taxes and trade license fees in Bahir Dar and Awassa. It shows that the default rates are high: 50-63% of the taxpayers in Bahir Dar and 27%-45% of the taxpayers in Awassa are in default. This suggests widespread tax evasion (as opposed to a situation where a few large taxpayers default and account for a significant proportion of the arrears), and indicates that the situation is worse in Bahir Dar as compared to Awassa. In Bahir Dar, the number of people with arrears exceeds the number that pay their taxes. In Awassa, more people are paying their taxes but the average arrear per defaulter is large, especially in the case of property taxes. Apart from revealing a tendency for tax evasion, Table 6 also shows that the level of arrears is high in absolute terms and that the cumulative arrears are higher for the property tax as compared to the business license fees. Property tax arrears amount to Birr 1.7 million in Bahir Dar, that is, about three times it annual property tax base. The situation in Awassa is worse: property-related arrears amount Birr 2.0 million, equivalent to about four years of property tax revenues and just under half of its average annual own-source revenue. The above discussion suggests that administration is weaker (and/or harder) in the case of property taxes as compared to trade license fees both the default rates and the cumulative ET-Municipality_Study-July01 16

17 arrears related to property taxes are significantly higher. 15 This indicates that efforts to improve property tax administration should be accorded priority and are likely to create significant revenue gains for the municipalities. Table 6. Tax Base and Arrears in Bahir Dar and Awassa in 1999/00 Land Rent & Building tax (1) Bahir Dar Trade License fees (2) Total Land Rent & Building tax (3) Awassa Trade License fees (4) (1+2) (3+4) No. of payers (a) 4, ,920 5,281 2,259 7,540 No. of defaulters (b) 6,965 1,272 8,237 4, ,104 Total no. of taxpayers (c) 11,065 2,567 13,632 9,540 3,095 12,635 Default rate (b/c) 63% 50% 60% 45% 27% 40% Cummulative arrears, '000 Birr (d) 5, ,500 8, ,126 Revenue base 1999/00 for 1, ,316 2, ,544 specified tax, '000 Birr (e) Arrears as % of base (d/e) 332% 148% 281% 420% 135% 359% Average arrear per defaulter, in Birr (d/b) , ,788 Total Enforcement problems The fact that municipalities have very weak legal mechanisms to support enforcement of revenue collection helps explain, at least in part, the high default rates and arrears. In Gambella, for example, the municipality has no legal authority to take action against a business that has tax arrears. Its attempts to take defaulters to court have not worked due to reasons that include delays in the system, frequent reversals of court decisions, and inability to enforce court decisions. Where possible, the municipality has chosen to deny service to defaulters and to try and make them clear their outstanding debt before they are provided any municipal services that they require or request; this strategy has helped only marginally. There is clearly a need to develop legal and administrative mechanisms that can help municipalities improve enforcement. Payment procedures Local experts note that the high default rates can be attributed, at least in part, to the fact that the collection system and procedures are outdated, slow and inconvenient for taxpayers. These experts suggest that simplifying the payment procedures can help improve compliance and reduce the size of arrears. Experience in other countries lends support to such an approach. For example, the success of a property tax reform program in Indonesia was attributed largely to the introduction of simplified payment procedures and the collection incentives offered to a new intermediary or collection agency, that is, the local development bank. 15 It may be worthwhile to conduct additional research to identify the causes of differential performance between the two municipalities (eg. why property-tax arrears are higher in Awassa) and between the two types of taxes within a given municipality. ET-Municipality_Study-July01 17

18 Capacity constraints One of the reasons for the poor performance in revenue collection is the weak human resource capacity of the municipalities and the poor incentives structure. These problems are particularly acute in the departments that are responsible for tax and revenue administration. Specifically, these departments have limited number of personnel, their salaries are extremely low, and their education level is on average lower than that of municipal staff taken as a whole. In the four municipalities covered in this study, about 87% to 100% of the revenue administration staff have an education level of 12 th grade or lower. The number of revenue staff who have received education up to 12 th grade or less is as follows: 20 of the 22 (91%) in Awassa, all 5 (100%) of those in Gambella, 24 of the 30 (80%) in Bahir Dar, and 35 of the 36 (97%) in Dire Dawa. (See also Table 9 in Section 7). Summarizing the problems with revenue generation Overall, revenue generation efforts are plagued by six major problems. First, the tax base for important sources, such as the property tax and the business tax, is artificially small. This is because the municipalities have not been updating their records and also because informal business and properties are not included in the base. Second, the fees and tax rates tend to be obsolete and are, at times, difficult to administer. Third, collection rates are poor in many municipalities and they vary significantly from year to year. As a corollary, the default rates and cumulative arrears are high, and the problem appears to be worse in the case of property taxes. Fourth, the payment procedures are slow and inconvenient for tax payers. Fifth, the enforcement mechanisms are poor and the legal basis to support enforcement is very weak. This further encourages default and adversely affects efforts to settle arrears. Finally, the above problems in the system of tax administration are exacerbated by the weak human resource capacity of revenue staff and poor incentives for enhancing performance. External source of finance: grants, transfers and loans Financial flows from higher levels of government and other external sources to municipalities are, at times, significant. The problems, however, are that funds flows from external source are highly unpredictable, are generally targeted towards specific capital projects, and tend to be distributed on an ad hoc basis according to arbitrary and inconsistent criteria. 16 Municipalities do not receive regular financial support from higher levels of government because there is no tax sharing program, and the system of transfers that directs flows from the central government to regional governments does not reach or benefit municipalities. In addition, municipalities tend not to have access to credit from domestic financial institutions. Table 2 shows that on average external financing as a percent of the total financial resources or revenues was the highest in Gambella (45%), followed by Awassa (37%), Bahir Dar (32%) and Dire Dawa (8%). Gambella is the only town that receives regular and significant support from the regional government this accounts for 47% of its external financing and about 22% of its 16 Tesfaye (1997), p. 19. ET-Municipality_Study-July01 18

19 total revenues. The high proportion of external financing in Awassa and Bahir Dar is mostly due to a large loan from IDA (channeled thorough UDSS). 3.3 Municipal Expenditures First, municipal expenditure envelopes or levels appear to be determined, almost entirely, by actual revenues. For the period 1997/ /00, average annual expenditures were less than average total annual revenues (i.e. own-source plus external flows) in all four municipalities (Table 7). In fact, three of the four municipalities managed to keep their expenditure levels either below or just over their own-source revenue. On average, expenditures as a percent of own-source revenue were lowest in Awassa (66%) and Dire Dawa (70%), followed by Bahir Dar (103%) and Gambella (152%). Gambella was the only municipality that relied heavily on external funds to finance its expenditures. This can be explained by the fact the that Gambella s own source revenues are miniscule and the region has established a system of making regular, somewhat predictable, transfers to the municipality to allow for certain basic expenditures. Overall, the municipalities appear to be very disciplined on the expenditure side. However, the low expenditure levels may well be due, at least in part, to capacity constraints (i.e. an inability to spend or manage expenditures); this issue needs to be examined further. Second, the proportion of funds allocated to capital versus recurrent expenditures varies dramatically across the municipalities (Table 8). Of the four, Bahir Dar is the only municipality where capital expenditures exceeded recurrent expenditures over the period 1997/ /00. The percentage share of capital to recurrent expenditures, on average for the three year period, was 60:40 in Bahir Dar, 48:52 in Dire Dawa, 25:75 in Gambella and 15:85 in Awassa. In other words, the two larger towns (Bahir Dar and Dire Dawa) were able to direct about half or more of their budget towards capital projects, whereas the smaller towns (Gambella and Awassa) spent most of their budget on recurrent expenditures. Third, the proportion of expenditures accounted for by the wage bill that is, salaries plus pension benefits varies by municipality but is significant in all four (Table 8). On average, the wage bill as a percent of recurrent expenditures was 22-23% in Awassa and Bahir Dar, 37% in Dire Dawa and 59% in Gambella. Disaggregated expenditure data show that in three of the four towns, the wage bill increased dramatically between 1997/98 and 1999/00 41% in Bahir Dar, 96% in Awassa, and 137% in Dire Dawa (see Table 9 and Annex 4 for details). Fourth, an examination of expenditure data disaggregated by year, for the period 1997/ /00, shows that both total and capital expenditures fell in Dire Dawa and Gambella, perhaps, to compensate for the sharp increase in the wage bill in the former and an increase in non-wage recurrent expenditures in Gambella (Table 9 and Annex 4). In Bahir Dar and Awassa, the total, capital and wage expenditures increased over the same period; these appear to have been financed almost entirely by an increase in external finance rather than an increase in ownsource revenues. Table 7. The Relationship between Expenditures and Revenues in Four Towns Average annual figures over 1997/8-1999/00 ET-Municipality_Study-July01 19