ANNUAL REPORT 2014/15

REPUBLIC OF UGANDA LOCAL GOVERNMENT FINANCE COMMISSION ANNUAL REPORT 2014/15 The Local Government Finance Commission 1 Pilkington road, Workers House, 10 th floor P. O. Box 23143, Kampala, Uganda Tel +256-414-340192 Fax: +256-414-340228 Email: lgfc@lgfc.go.ug - www.lgfc.go.ug FINANCIALY SUSTAINABLE LOCAL GOVERNMENTS 1

Telephones: Chairman. 340226 Vice-Chairperson.342456 Commission Secretary. 340227 General Lines...340192 Fax 340228 Email lgfc@lgfc.go.ug THE REPUBLIC OF UGANDA LOCAL GOVERNMENT FINANCE COMMISSION 10 th Floor Workers' House Plot 1 Pilkington Road P.O. Box 23143 The Rt. Hon. Speaker Parliament of Uganda Parliament House Kampala Madam Speaker, July 11, 2016 RE: LOCAL GOVERNMENT FINANCE COMISSION ANNUAL REPORT 2014/15 In compliance with Section 25(I) of the Local Government Finance Commission Act 2003, I have the honor and pleasure to submit to you the Annual Report for the Local Government Finance Commission in respect of the activities, challenges and recommendations for the year 2014/15. Tom Matte CHAIRPERSON LOCAL GOVERNMENT FINANCE COMMISSION CC: The Hon Minister Ministry of Local Government The Permanent Secretary Ministry of Local Government 2

CONTENTS ABBREVIATIONS AND ACRONYMS... IV MESSAGE FROM THE CHAIRPERSON... 4 MEMBERS OF THE FIFTH COMMISSION (2013 2017)... 6 EXECUTIVE SUMMARY... 10 1.0. THE MANDATE AND FUNCTIONS OF THE COMMISSION... 12 1.1 THE FUNCTIONS OF THE COMMISSION... 12 1.2 VISION, MISSION AND VALUES... 12 1.3 COMPOSITION OF THE COMMISSION... 13 2.0 INTRODUCTION... 15 2.2. CONTRIBUTING TO IMPROVEMENT OF THE STATE OF FUNDING.15 3.0 SUPPORTING LOCAL GOVERNMENTS 22 3.1 ESTABLISHMENT OF LOCAL REVENUE DATABASES... 22 3.2 ANALYSIS OF THE TREND OF LOCAL REVENUES... 24 3.3 TECHNICAL SUPPORT FOR PROPERTY RATE COLLECTION... 25 3.4 LOCAL REVENUE ENHANCEMENT COMMITTEE MEETINGS... 26 4.0 ENHANCING THE INSTITUTIONAL CAPACITY OF LGFC... 27 4.1 BUDGET PERFORMANCE FOR FY2014/15... 27 4.2 POLICY ANALYSIS)... 27 4.3 HUMAN RESOURCES MANAGEMENT... 29 4.4 ENHANCEMENT OF THE MANAGEMENT INFORMATION SYSTEM... 29 4.5 STRENGTHENING THE FISCAL DATA BANK... 29 4.6 IMPLEMENTATION CHALLENGES... 30 5.0 BUILDING PARTNERSHIPS AND SYNERGY...31 5.3 PARTICIPATING IN PUBLIC SECTOR MANAGEMENT SECTOR ACTIVITIES...31 5.4 FACILITATING BUDGET FRAMEWORK PAPER WORKSHOPS...31 6.0 GENERAL RECOMENDATIONS... 33 ANNEX 1:STAFF OF LGFC AS AT 30TH JUNE 2015... 34 ANNEX 2: FY2014/15 PERFORMANCE OF RELEASES TO DISTRICTS..35 ANNEX 3: PERFORMANCE OF RELEASES TO MUNICIPAL COUNCILS... 38 ANNEX 5: REVENUE ALLOCATION TO TOP PRIORITY AREAS... 42 3

ABBREVIATIONS AND ACRONYMS BFP CG FDA FDS FINMAP FY LG LGBFP LGFC LGHT LGMSD LRECC LST MC MDAs MOFPED MOLG NDP NPA PSM TC TOR Budget Framework Paper Central Government Fiscal Decentralisation Architecture Fiscal Decentralisation Strategy Financial Management and Accountability Programme Financial Year Local Government Local Government Budget Framework Paper Local Government Finance Commission Local Government Hotel Tax Local Government Management & Service Delivery Local Revenue Enhancement Coordinating Committee Local Service Tax Municipal Council Ministry, Departments and Agencies Ministry of Finance, Planning & Economic Development Ministry of Local Government National Development Plan National Planning Authority Public Sector Management Town Council Terms of Reference MESSAGE FROM THE CHAIRPERSON 4

During the FY2014/15, the Commission implemented some of the activities in the Strategic Plan (FY2012/13 FY2015/16). This report presents what was carried out and the challenges faced. During the year under review, a consultant was procured to review the allocation formula to ensure equity in the allocation of financial resources from the central government to local governments. The Local Government Finance Commission also began the process of reviewing its structure and establishment to make it responsive to the current needs. At the same the commission began a process of producing regulations to put into effect the Local Government Finance Commission Act 2003. All these are intended to strengthen the commission to fulfill its mandate. The establishment of data bases for efficient management of Local revenue covered 16 districts and 14 municipal councils. Local revenue registers for at least 5 revenue sources have been computerized. The plan is to cover all local governments in the medium term. The Commission analysed the share of financial resources from the consolidated fund to local governments and observed that the trend took a further downward trend in the last two financial years from 17% in FY2012/13 down to 16% in the year under review. Specifically, the unconditional grant dropped further from 4% in FY2013/14 down to only 3.5% in FY2014/15. Convening and facilitating the annual negotiations between local governments and line sector ministries on effective utilization of conditional grants from the 7 sector ministries to local governments, was one of the key activities of the Commission. I am grateful to the Office of the Prime Minister, the Committee of Parliament of the Republic of Uganda on Public Service and Local Government, the Hon. Minister of Finance, Planning and Economic Development and the Hon. Minister of Local Government and the Ministry of Public Service, for supporting the work of the Commission. The Commission is grateful to the National Planning Authority, Uganda Local Government Association (ULGA) and Urban Authorities Association of Uganda (UAAU) for their technical and expert contribution towards the annual negotiations between sectors and local governments on the utilization of conditional grants. Lastly, I am also grateful to the members and staff of the Commission for commitment and hard work put into planning and management of the negotiation process which enabled us to realize the intended results. Tom Matte CHAIRPERSON LOCAL GOVERNMENT FINANCE COMMISSION 5

MEMBERS OF THE FIFTH COMMISSION (2013 2017) TOM MATTE CHAIRPERSON Mr. Tom Matte is the Chairperson of the Local Government Finance Commission (2013 2017). He represents the Central Government. Prior to his appointment, he served as a Public Administrator in various districts and Ministries rising to the rank of Director in the Ministry for Local Government, a level at which he retired. MRS. SARAH NAMBASSA MUKASA VICE CHAIRPERSON Mrs. Sarah Nambasa Mukasa is the Vice Chairperson. She was reelected in 2013 and is serving her second and last term having been first elected Vice Chairperson during her first term in October 2008. She represents Central Government. Mrs. Mukasa is a distinguished professional Accountant with vast experience having previously worked in the Ministry of Finance, Planning and Economic Development and Uganda Revenue Authority in various capacities. MR. ADRIAN KYAMUGINA MEMBER Mr. Adrian Kyamugina represents Central Government and is serving his second and last term. He is an experienced tax administration specialist with a long track history of service in the East African Community, Ministry of Finance and Uganda Revenue Authority where he rose to the rank of Deputy Commissioner Customs, Finance and Administration, Commissioner Internal Audit and Tax Investigation until 2005 when he retired. He is now a tax consultant, a Chairperson of Finance and Strategic Planning Committee, Kampala International University Council and Vice- Chairperson, Kampala International University Teaching Hospital. Mr. Kyamugina is the Chairperson, Finance and Administration Committee. 6

HON. MILIGAN ROSE LOCHIAM MEMBER Hon. Miligan Rose Lochiam represents District Local Governments and is serving her first term. She has a lot of experience in Public Affairs Management having been a Member of Parliament for Moroto District. She is the Chairperson, Audit Committee. MR. CHARLES KATARIKAWE MEMBER Mr. Charles Katarikawe represents Urban Authorities Association of Uganda and is serving his first term. He has a very long experience in Urban Authorities administration having served as Town Clerk in various town councils and municipalities of Uganda. He also served in Namibia as a consultant on decentralized governance. He retired from the Ministry of Local Government at the rank of Commissioner, Urban Administration. HON CAPT. JOHN EMILY OTEKAT MEMBER Hon. Capt. John Emily Otekat represents District Local Governments and is serving his first term. He has vast experience in Public Affairs and Local governance. He was chairperson of Soroti District and President of Uganda Local Governments Association (ULGA). He represented Soroti in Parliament and is also a member of the Uganda Wild Life Authority Board. He chairs the Research and Policy Analysis Committee. 7

MMR. SAM OGENRWOTH MMEMBER Mr. Sam Ogenrwoth represents District Local Governments and is serving his first term. He has a wealth of experience in public management and Administration having served in many parts of Uganda as administrative officer for many years rising to the rank of Chief Administration Officer (CAO) at which he retired. THE TOP TECHNICAL STAFF MR. LAWRENCE BANYOYA COMMISSION SECRETARY The Commission Secretary is a public officer appointed by the Commission in consultation with the Public Service Commission and specified in his or her instrument of appointment. He is the head of the Secretariat and responsible for day to day administration of the Commission. He is assisted by the Director Finance and Administration and Director Research and Policy Analysis. 8

MR.JIM ASHABA AHEEBWA DIRECTOR FINANCE AND ADMINISTRATION The Director provides support services to the Commission in areas of financial management, human resource management/development, administrative services, logistical and information management systems. Procurement/Disposal, Monitoring & Evaluation. MR. ADAM BABALE DIRECTOR RESEARCH AND POLICY ANALYSIS The Director undertakes research and provides technical support to Local Governments on various aspects related to fiscal decentralization for improved service delivery. The Directorate makes analysis of sector policies to derive evidence-based advice that the Commission provides to H.E. the President; the Central Government, Local Governments and other agencies on the financing of local governments 9

EXECUTIVE SUMMARY During the FY2014/15, the Commission implemented planned activities under the four strategic areas in the medium term highlighted in the Strategic Plan (FY2012/13 FY2015/16) namely: (i) Contributing to the improvement of the state of funding for LGs in the national budget; (ii) Promoting equity in resource allocation among LGs; (iii) Supporting LGs to improve Local Revenue performance; and (iv) Enhancing the institutional capacity of the LGFC to effectively perform its mandate. The Commission received UShs 4.578 billion of which UShs 0.311 billion was for development, UShs 1.119 billion for wage and, UShs 3.148 billion for non-wage recurrent. The funds were used to carry out the following activities: Tracking the trend in the Transfer of Central Government Grants to Local Governments The Commission analysed the share of financial resources from the consolidated fund to local governments. The analysis indicated that the approved direct budget transfers in nominal terms increased from Ugx. 1,855.5bn in FY 2012/13 to Ugx. 2,360.2bn in FY 2014/15. However, as a share of the national budget, it exhibited a downward trend in the last two financial years from 17% in FY2012/13 to 16% in the year under review. The unconditional grant dropped from 4% in FY2013/14 to only 3.5% in FY2014/15. Convening and facilitating the Annual Negotiations on effective implementation of conditional grants funded programs The commission convened and facilitated annual negotiations between sector line ministries and local governments. Agreements were signed with 7 sectors line ministries managing conditional grants. To ensure effective implementation of the agreements, each party was obliged to take certain actions as indicated below: The sectors were charged with preparing revised guidelines and disseminating them to LGs for preparing the budget for FY 2015/2016 not later than 15th April 2015. The sector line ministries were required to attach the signed agreements for FY 2015/16 as annexes to respective Ministerial Policy Statements. The sector line ministries and local governments alike were required to implement agreed activities in accordance with the respective agreements signed. ULGA and UAAU were charged with disseminating the agreements to local governments whom they represent Analyzing Local Government Approved Annual Budgets for FY2014/15 The Local Government Finance Commission analyzed 133 vote holder LGs approved annual budgets for the year under review for compliance with legal provisions. The analysis found out that 5 districts had approved and submitted unbalanced budgets. The Commission provided feedback to the concerned Local Governments. All districts councils did not allocate reasonable funds to national priorities from local revenues. Funds from local revenues were mainly allocated to the departments of Finance, Statutory Bodies, Planning and Internal Audit. This implies that national priorities are basically funded through conditional grants. 10

Establishment of local revenue data bases During the year under review, the Commission supported 45 LGs with skills to establish databases for all local revenue sources. Continued to provide technical support in the collection of property rates. The technical support focused on strategies to improve the compilation of property registers, valuation rolls and collection methods. During the same year under review, the Commission facilitated three policy dialogue meetings of stakeholders on revenue enhancement. The key issues discussed during the meetings were: Review of legal provisions for local revenue management in local governments. Progress on the USMID programme in terms of targets and funding levels; Implications of the revoked Cess on produce Licenses Management of vehicle parks and markets. Establishment of fiscal databases and challenges in database management in local governments Under institutional capacity enhancement, the Commission carried out one outreach in the districts of Nwoya, Arua and Nebbi. The overall objective was to meet with LG leaders that include the District Executive Committee (DEC) and District Technical Planning Committee (DTPC) to generate ideas on Local Economic Development (LED), Commercial Agriculture and Royalties as potential sources of local revenues for local governments. The Commission approved implementation of a staff health insurance policy; reviewed the Human Resource Policy; conducted team building workshop and recruited the following staff; 1 Senior Policy Analyst, 1 Senior Revenue Officer, 1 Revenue Officer, and Senior Stores Assistant. 11

1.0. THE MANDATE AND FUNCTIONS OF THE COMMISSION The Commission derives its mandate from Article 194 (1) of the Constitution of the Republic of Uganda (1995) and it functions as defined under Article 194 (4) of the Constitution. The Commission s mandate and functions are elaborated in section 9 of the Local Government Finance Commission Act (2003). 1.1 The Functions of the Commission The Commission is mandated to carry out the functions below: a) Advise the President on all matters concerning the distribution of revenue between the Government and Local Governments and the allocation to each Local Government of money out of the consolidated fund. b) Consider, in consultation with the National Planning Authority, and recommend to the President the amount to be allocated as equalization and conditional grants and their allocation to each Local Government. c) Consider and recommend to the President potential sources of revenue for Local Governments. d) Advise the Local Governments on appropriate tax levels to be levied by Local Governments. e) Mediate in case a financial dispute arises between Local Governments and advise the Minister accordingly. f) Analyse the annual budgets of Local Governments to establish compliance with the legal requirements and notify the Councils concerned and the President through the Minister for appropriate action. g) Recommend to the President through the Minister, the percentage of the National Budget to be transferred to Local Governments every financial Year. h) Recommend to the President, Central Government taxes that can be collected by Local Governments in their respective jurisdiction on an agency basis. i) Perform such other functions as may be prescribed by law. 1.2 Vision, Mission and Values To fulfil the above functions the Commission has the following Vision, Mission and Values 1.2.1 Vision Statement Financially Sustainable Local Governments 1.2.2. Mission Statement To offer credible and evidence-based advice to Government on financing Local Governments. 1.2.3. Values The Commission subscribes to the following values as enshrined in the Code of Conduct and Ethics for Uganda Public Service: a) Professionalism: which calls for strict adherence and exposition of high degree of competence and best practices as prescribed for in a given profession b) Commitment: which encourages loyalty to policies and programmes of the Commission c) Team Work: which encourages cross-functional integration; voluntary mentorship and coaching taking responsibility; and flexibility 12

d) Transparency: which causes openness about all the decisions and actions taken by a public officer e) Integrity: which requires honesty and openness in conducting public affairs 1.2 Composition of the Commission The Commission comprises seven (7) members representing constituent interest groups as indicated below: Three (3) members represent District Councils; One (1) member represents Urban Councils; and Three (3) members represent the Central government nominated by the Minister responsible for Local Governments (MoLG) in consultation with the Minister responsible for Finance (MOFPED). The Chairperson and the Vice Chairperson are elected on the first sitting from amongst the seven (7) members and are engaged on full time basis while the five (5) members are part time. Members of the Commission are appointed by the President of the Republic of Uganda for a period of four (4) years but are eligible for reappointment for another four year term in accordance with the Constitution and the Local Government Finance Commission Act (2003). 1.3.1. Committees of the Commission The Commission operates under three Committees namely: Finance and Administration Committee The Finance and Administration Committee ensures value for money spent on all Commission activities and compliance with applicable laws, regulations and standards. The finance and administration committee met three times during the year to consider recruitment, confirmation and promotion of staff. It also dealt with policy proposals and finance and administration matters Audit Committee The Audit Committee assists the Commission in overseeing the quality and integrity of the financial statements, the scope and effectiveness of the external audit function; and the effectiveness of the Commission s internal controls and internal audit function. The mandate of the Committee also includes oversight of the Commission s performance against predetermined objectives and Commission s financial and non-financial risk management and fraud prevention efforts. All members, except the Chairperson, sit on the Audit Committee and during the year under review, the committee met two (2) times. Research and Policy Committee The role of the research and policy Committee is primarily to assist the Commission in overseeing research and policy related matters. The Committee provides technical support for the work of the Commission s research and policy recommendations. Activities include making recommendations on programme outputs, reviewing concept notes for the implementation of approved programmes; providing strategic direction in the process of programme implementation and monitoring progress. Equally critical is the committee s role 13

in developing and tracking effects of national policies on financing of Local Governments and making recommendations for the approval of the Commission. 1.4. Funding for the Commission The Local Government Finance Commission is self-accounting (Vote 147) as per section 17 (4) of the Local Government Finance Commission Act, 2003. It is funded from the Consolidated Fund in accordance with article 194 (5) of the Constitution but can also be funded through grants and donations from non-government sources with the approval of the Minister responsible for Local Governments. Currently all funding comes from the Government. 14

2.0 REPORT ON PERFORMANCE IN FY2014/15 2.1 Introduction This section highlights the performance of the Commission under each medium term strategic objectives namely: (i) Contributing to the improvement of the state of funding for LGs in the national budget; (ii) Promoting equity in resource allocation among LGs; (iii) Supporting LGs to improve Local Revenue performance; and, (iv) Enhancing the institutional capacity of the LGFC to effectively perform its mandate in line with the overall decentralization policy, National Development Plan, Public Sector Management Strategic Investment Plan and the Local Government Sector Strategic Plan. 2.2. Contributing to Improvement of the State of Funding for Local Governments in the National Budget Under this medium term objective, the Commission carried out four main activities namely: (i) Tracking the trend of central government transfers to Local Governments; (ii) Organising and facilitating the Annual Sector Conditional Grants Negotiations between sector ministries and local governments; (iii) Analysing Local Government Budgets; and (iv) Supporting local governments to improve budget formulation and execution processes. 2.2.1 Tracking the Trend in the Transfer of Central Grants to Local Governments Grants constitute the major source of revenue to Local Governments. Under Article 193 of the Constitution of the Republic of Uganda three (3) categories of grants are provided for transfer to Local Governments. Under Article 194 (1)(a) the Commission is to make recommendations to the President concerning the distribution of revenue between Government and Local Governments and the allocation to each Local Government of money out of the consolidated fund. The commission therefore tracks the trend of transfers of the following grants: (i) Unconditional Grants In accordance with article 193 (2) of the Constitution, unconditional grant is the minimum grant that is paid to Local Governments to run decentralized services. The grant is intended to fund non-wage for services decentralised to Local Governments. (ii) Conditional Grants These are grants that consist of monies given to Local Governments to finance programmes agreed upon between Sectors and Local Governments. These grants have conditionality agreed upon and must be expended in accordance with the purpose for which they are given by Central Government. (iii) Equalisation Grant Equalisation grant is money paid to Local Governments as subsidies or provisions for the least developed districts which should be based on the degree to which a local government service is lagging behind the national average standard for a particular service. It is therefore determined and allocated based on analysis of service standard or levels in each Local Government for each service. 15

During the period under review the Commission analysed the grants transfer as indicated below: 2.2.2. Performance of Grant Releases to LGs FY 2014/2015 in Ushs'000 During the period FY 2014/2015 the releases during the year under review performed at an average of 89%. Category Amounts (for 133 LGs) Approved Budget Actual Released Performance Wage Recurrent 1,518,686,792 1,337,597,520 88% Non-wage Recurrent 713,619,616 701,141,519 98% Domestic Development 543,178,971 433,385,073 80% Total 2,775,485,380 2,472,124,112 89% Wage recurrent performed at 88%, non-wage. Recurrent at 98%, and Domestic Development performed at 80%. The Trend of Grants between FY2010/11 to FY2014/15. The analysis of the trend covered the disaggregated releases for the period of five years, i.e.fy2010/11 to FY2014/15 as indicated below. Trends of Grant Transfers to LGs Against the Share of the National Budget (Ushs' Billions) FY Unconditional Grant G tax Compensation Equalisation Grant Conditional Grant Total Amount % of Total Transfers to LGs Amount % of Total Transfers to LGs Amount % of Total Transfers to LGs Amount % of Total Transfers to LGs Transfers to LGs National Budget % of Direct Transfers to National Budget 2010/2011 156.7 10.6% 45 3.1% 3.5 0.2% 1,269.60 86.1% 1,474.80 7,376.50 20.0% 2011/2012 77 4.7% 0 0.0% 3.5 0.2% 1,575.20 95.1% 1,655.70 9,630.00 17.2% 2012/2013 79 4.3% 0 0.0% 3.5 0.2% 1,773.00 95.6% 1,855.50 10,902.80 17.0% 2013/2014 79.6 4.0% 0 0.0% 3.5 0.2% 1,896.30 95.8% 1,979.40 12,904.00 15.3% 2014/2015 82.57 3.5% 0 0.0% 3.6 0.2% 2,274.00 96.3% 2,360.17 15,054.00 15.7% Source: LG Final Accounts The table above, shows a decline in the share of financial resources from the consolidated fund to local government taking a downward trend from 20% in FY2012/13 down to 15.7% in the year under review. The unconditional grant dropped from 4% in FY2013/14 to 3.5% in FY2014/15. The drop affected the discretion for local councils in setting their local priorities in their respective local governments. 2.2.3. The trend of the share of grant transfers to LGs verses National Budget The commission also analysed the trend of transfers to local government against the national budget and the results are as shown in the bar chart below. 16

Amount in Ushs' Billions Transfers in UShs' Billions 16000 Trends of Grant Transfers to LGs Versus the Share of the National Budget (Ushs' Billions) 14000 12000 10000 8000 6000 4000 2000 0 2010/2011 2011/2012 2012/2013 2013/2014 2014/2015 Financial Year Unconditional Gtax Compensation Equalisation Conditional Total Transfers to LGs National Budget Source: LGs final Accounts The bar chart above shows that while the national budget grew steadily the transfers to LGs, especially equalisation grant, have remained more or less stagnant. The graph below illustrates the trend more clearly. Total direct transfers to LGs versus the National Budget for the period 2010/11-2014/15 Trends of Total Direct Transfers to LGs Versus the National Budget (Ushs' Billions) 16,000.00 14,000.00 12,000.00 10,000.00 8,000.00 6,000.00 4,000.00 Total Transfers to LGs National Budget 2,000.00 0.00 2010/2011 2011/2012 2012/2013 2013/2014 2014/2015 Financial Year Source: LG Final Accounts 17

2.2.4. Facilitation of Annual Negotiations on Sector Conditional Grants The commission organized and facilitated the annual negotiations between sector line ministries and Uganda Local Governments Negotiating and Advocacy Team (UNAT) in accordance with Article 193 (3) of the Constitution of the Republic of Uganda which states that Conditional grants shall consist of monies given to Local Governments to finance programmes agreed upon between the government and the Local Governments and shall be expended for purposes for which it was made in accordance with the conditions agreed upon. The main objective of holding the annual negotiations is to provide a forum for discussion between the central government line ministries and local governments with a view of coming up with effective mechanisms to support the implementation of programmes funded through conditional grants. During the year under review, the specific objectives for the negotiation were: 1. To discuss and agree on sector guidelines for FY2015/16 2. To clarify to all stakeholders what part of national sector policies local governments are to implement and agree on priorities for FY2015/16. 3. To review conditions for fairness in the sharing of funds between central government responsibilities and those assigned to local governments; 4. To identify pertinent issues affecting service delivery in local governments; 5. Agree on modalities with respect to work plans, budgeting and reporting. The negotiation meetings were held between the 29 th September and 3rd October 2014 and all the seven sector line ministries that provide conditional grants participated and these are: 1. Ministry of Water and Environment, 2. Ministry of Education, Science, Technology and Sports, 3. Ministry of Agriculture, Animal Industry and Fisheries, 4. Ministry of Trade, Industry and Cooperatives, 5. Ministry of Health, 6. Ministry of Gender, Labor and Social Development, 7. Ministry of Works and Transport. Cross-cutting ministries and agencies also participated in the negotiations and provided policy clarifications on cross cutting policy areas under their respective jurisdictions. They iare: 1. Ministry of Finance, Planning and Economic Development, 2. Ministry of Public Service 3. Ministry of Local Government, 4. Office of the Prime Minister and 5. National Planning Authority 2.2.5.General obligations agreed upon The negotiations came up with the following generally agreed positions: 1. The sectors to prepare and disseminate specific sector and grant utilization guidelines for ( 18

2015/2016) not later than 15th April 2015. 2. The Sector line ministries to attach the signed agreements for the financial year 2015/16 as annex to respective Ministerial Policy Statements. 3. Communicate to the Chief Administrative Officers and Town Clerks the issues agreed upon in the negotiations for Local Governments to implement in their respective sectors. 4. Sector line ministries and local governments to ensure timely response to issues raised by the Local Governments, Local Government Associations and Local Government Finance Commission. 5. Each party to implement its obligations in accordance with signed agreement. 6. Local Government Finance Commission to liaise with Ministry of Finance Planning and Economic Development (MOFPED) to ensure that all funds for capital development are released to Local Governments by the third Quarter of each financial year. 7. Sectors to ensure adequate involvement and participation of the Accounting Officers of Local Governments in sector reviews. 8. Sector line ministries to invite and provide a slot to the Local Government Associations (ULGA and UAAU) to present on the key issues affecting service delivery. Specific sector issues that affect service delivery in LGs as outlined in Annex 3 were noted for further follow up and consideration under each sector. 2.2.6.Challenges faced during negotiation and Recommendations The Commission experienced challenges in the process of organizing and facilitating annual negotiations enumerated as follows: i) There are no in-built sanctions on either parties especially the sector ministries in case of failure to implement actions agreed resulting into slow progress towards the achievement of intended objectives of the negotiations. Recommendation: It was recommended that sanctions should be created to ensure that parties effectively observe and implement agreed positions. ii) There is inadequate sector collaboration in annual planning with LGs on activities under conditional grants. As a result there is a gap in information sharing between the parties leading to reoccurrence of issues every year the negotiations are held. Recommendation: Sector Accounting Officers should deliberately invite Local Government and the Commission to participate in discussions on financing issues of LGs during the annual sector reviews. iii) Sector line ministries do not observe provisions of Article 193(3) of the Constitution of the Republic of Uganda and Section 83(3) of the Local Governments Act Cap 243 which state that Conditional grants shall consist of monies given to Local Governments to finance Programmes agreed upon between the Government and Local Governments; and shall be expended only for purposes for which it was made in accordance with the conditions agreed upon. The practice is that release of conditional grants are not based on agreed Programmes upon between Sectors and Local Governments but on the conditions agreed upon. Recommendation: Sector line ministries should ensure that expenditures on conditional grants are on those 19

Programmes that reflect the needs and priorities of the local people or agreed on with LGs. For effective organization and facilitation for annual negotiations, the Commission requires aa adequate budget. The current provision in the MTEF is inadequate and with limited quarterly cash limit, the Commission continues to struggle to fund negotiations. The Commission requires an estimated budget UShs 200 million additional to be able to effectively engage all parties involved and effectively monitor the agreed undertakings within scope and timeline. Recommendation: Additional budget should be provided by Ministry of Finance Planning and Economic Development. 2.3.0 Analysis of LGs approved Budgets for FY2014/15 The Commission analyzed the approved budgets of local government for FY2014/15.The task was carried out in accordance with Section 9(f) of the Local Government Finance Commission Act, 2003 which gives the Commission the obligation to analyse LGs approved budgets. The analysis focused on compliance with the following: i. Establish whether the LG budget balances 1 ii. Establish whether the LG Budget reflect all the revenues to be collected or received by the local government and to be appropriated for each year 2. iii. Ascertain whether the LG accorded national priority programme areas preferential budget outlays (especially when considering discretionary resources such as Local Revenues) 3 iv. Establish whether the LG had indicated how the conditional and equalisation grant obtained from Government have been passed on to lower local governments 4 v. Establish whether the LG had secured a loan or any assistance to use in providing service delivery 5 vi. Confirm whether the local revenue collected has been shared in the legally provided ratios 6. 2.3.1 Key Findings/Observations from the analysis of the 2014/15 Budgets 2.3.2 Balancing the Budgets All except five districts had balanced budgets. The five districts with unbalanced budgets are shown in the table below: 1 Section 77 (1) of the Local Governments Act (CAP 243) 2 Section 77 (4) of the Local Governments Act (CAP 243) 3 Section 77 (2) of the Local Governments Act (CAP 243) 4 Section 83 (5) of the Local Governments Act (CAP 243) 5 Article 195 of the Constitution of the Republic of Uganda and Section 84 of the Local Governments Act (CAP 243) 6 Section 85 of the Local Governments Act (CAP 243) 20

Districts with Unbalanced Budgets FY 2014/2015 Vote District Total Revenues Total Expenditure Total Rev minus Total Expenditure 524 Kibaale 40,176,820 40,181,091 (4,271) 528 Kotido 11,637,663 11,654,120 (16,457) 530 Kyenjojo 26,046,206 23,882,373 2,163,833 545 Nebbi 30,640,182 30,640,782 (600) 551 Sembabule 21,090,382 21,083,281 7,101 TOTAL 129,591,253 127,441,647 2,149,606 Source: LGFC LGs Fiscal Databank (i) Inclusion of National Priorities Local governments are majorly funded through conditional grants which creates operational framework that ensures that national priorities are earmarked for funding. (ii) Allocation of Revenues to National Priorities A total of Ushs 94bn was collected as locally raised revenue and this was discretionary allocated to different sectors. It was noted that discretionary revenue were allocated proportionately. Analysis of the 111 district local governments, revealed that: (i) 40% of the districts did not allocate local revenue to the water sector (ii) 14% of the districts did not make any allocation to Roads and Engineering (iii) 8% of the districts did not make allocations to the education sector (iv) 17% of the districts did not make allocations to Health Sector (v) 4% of the districts did not make allocations to the production sector Annex 5 shows the level of allocation to the top national priorities of production and marketing, health, education, roads and water 2.3.4. Supporting the Operations of the Local Government Budget Committee (LGBC) The Local Government Budget Committee (LGBC) is a multi-sectoral Committee that is facilitated by the Commission to engage relevant sectors in policy dialogue on matters of budget formulation and operation in Local Governments. During the year under review, the committee held only one meeting due to resource constraint whose major agenda was to discuss a draft report on the review of the Grants Allocation Formulae to cater for crosscutting issues and a draft report on Local Government Budget analysis. 2.3.5. Review of Grants allocation formulae: The Commission facilitated a study on the review of grants allocation formulae being one of the priority areas highlighted in the National Development Plan and also emerged from the study on LG financing conducted in FY2012/13. 21

The main objective of the study was to review the allocation formulae of grants to Local Governments to make them respond to challenges of cross cutting issues namely: HIV/AIDS, Environment and Gender. Specifically, the study focused on the following areas: i) Document the current grants allocation formulae for all the seven sectors ii) Determine the extent to which the current allocation parameters address cross-cutting issues (poverty, gender, HIV/AIDs and environment). iii) Determine a conservative national estimate of the resources required addressing /finance activities in each of the grants to cater for cross cutting issues. iv) Recommend parameters to enable sectors address cross-cutting issues for grants 2.3.6 Recommendations The Commission made the following recommendations: i) UGX 69 billion be sought to fund the gaps identified to implement strategies to address the crosscutting issues (Gender, environment and HIV/AIDS) for decentralized services. ii) LGs should be supported to develop efficiency and clear supportive programs, that will put measures to reduce wastage of resources such as construction materials, water, energy and other production inputs without affecting productivity and the environment. iii) Community contribution as recommended by the study on the Review of LG financing; coupled with training should be implemented in the Health and Education sectors. iv) The Ministry of Water and Environment s requirement for EIA for every project should be enforced to reduce environmental degradation in the country. v) Sectors should plan and budget for expenses to cover operations and monitoring by LGs. 3.0 SUPPORTING LOCAL GOVERNMENTS IMPROVE LOCAL REVENUE GENERATION The Commission is obliged under Article 194 (4c and d) to recommend to the President potential sources of revenue for local governments and advise local governments on appropriate tax levels. During the year under review, the Commission carried out four major interventions namely: (i) supported LGs to establish databases for all local revenue sources; (ii) analyzed the trend and the performance of local revenues; (iii) provided technical support to LGs in mechanisms for collection of property rates; and (iv) convened and facilitated the operations of the Local Revenue Enhancement Coordinating Committee. 3.1 Establishment of Local Revenue Databases It had been established in 2011 that lack of credible data on local revenues was one of the constraints affecting local revenue performance. Establishment of local revenue databases was pioneered in Kalangala district local government (DLG) in FY2011/12 and just after one financial year, local revenue had increased from UShs 98,000,000 million in FY11/12 to UShs 589,000,000 in FY2012/13. The objectives of the intervention The objective of this exercise was to provide technical support to LGs to: 22

i) Support local revenue establish computerised database for all the local revenue sources in the local governments. ii) Enable the supported local governments establish their local revenue potential based on the registers developed. iii) Build the capacities of LGs in local revenue administration. Activities carried out Commission trained LG officials in the establishment of local revenue database specifically targeting officers involved in the administration and management both at district and lower local government levels. Political leaders also participated in the training sessions. The training mainly focused on: i) Registration of tax payers and developing registers by local revenue source ii) Assessment of the annual tax each payer should pay by local revenue source iii) Capturing the tax payers in the data base by local revenue source. iv) Effective collection and/or enforcement mechanisms for local revenue collection and management. The established databases for local revenue sources have the following benefits to local governments and other stakeholders. i) Improve in the quality of data that can guide effective planning and forecasting of annual local revenue projections. ii) Enable LGs to capture revenue payments and produce instant reports on registration, payment and summary reports; and iii) Promote effective monitoring and review local revenue performance iv) It is a management tool for decision making on local revenue collection. During the year under review, the Commission supported 45 LGs 7 with skills to establish databases for all local revenue sources. Challenges in Establishment of Local Revenue Databases During the provision of technical support to the 45 LGs in the establishment of local revenue databases, the following challenges were noted: i) Low staffing levels in LGs is affecting timely collection of data and development of registers. This challenge is particularly experienced at Sub County and Parish Level, for example during theperiod under review Kumi DLG had only three (3) substantive sub county chiefs in post instead of the required seven (7) sub county chiefs and out of the 83 parish chiefs needed only 30% of the Parish Chiefs were in post. ii) Laxity on the part of the LG staff to collect data and establish the computerized registers. iii) Local Government Amendment No. 2 Act 2008 stipulate the establishment of Tax enumeration Committee; Tax Assessment Committee and Tax assessment Appeals 7 Buikwe, Bukedea, Amolatar, Moroto, Napak, Hoima, Kamuli, Kaberamaido, Dokolo, Mpigi, Mityana, Kiboga, Kayuga, Mubende, Kapchorwa, Sironko, Apac, Kitgum, Kisoro, Nakasongola, Kamuli,TC, Kaberamaido TC, Dokolo Tc, Mpigi TC, Mityana, TC, Kiboga TC, Kayunga TC, Moroto TC, Napak TC, Hoima TC, Mubende TC, Kapchorwa TC, Sironko TC, Apac TC, Kitgum TC, Kisoro TC, Nakasogola TC, Kakooge tc, Migyera TC, Namasale TC, Njeru TC, Nkokojeru TC, Lugazi TC, Amolatoar TC, and Buikwe TC. 23

Tribunal Committee. However, these Committees are not in place in most districts supported due to inadequate facilitation to effectively carry out their functions. iv) Inadequate transport equipment has limited collection of data in LGs v) The absence of strong enforcement mechanisms in the mobilization has seriously weakened collection of local revenue in LGs. vi) Limited availability of equipment particularly computers and printers for the units of Local revenue both at higher and lower local governments is making it difficult to capture data from paper registers into the computer. Recommendations to Mitigate the Above Challenges i) In order to address the above challenges, the Commission wrote to the Ministry of Local Government requesting the Permanent Secretary to direct CAOs to prevail over their staff to compile and maintain local revenue registers both in soft (database) and hard copies. ii) The Commission recommended to the Ministry of Finance, Planning and economic Development that the local revenue database software should have linkages with the other public finance management reform tools especially the OBT. iii) The Commission recommended to the Ministry of Public Service and Ministry of Finance Planning and Economic Development that Local Revenue Units should be established in the Local Governments 3.2 Analysis of the Trend of Local Revenues The trend in the performance of local revenue for period FY2010/11 to 2013/14 indicate an improvement from UShs 111 billion in FY 2010/11 to UGX 153 billion in FY 2013/14 against an estimated potential of UGX 334 billion 8. Table below shows the performance in the four financial years. Table showing Trends of Local Revenue Performance (U shs 000) Source 2010/11 2011/12 2012/13 2013/14 LST 6,542,312 7,115,367 10,786,472 10,113,773,746 LGHT 928,320 1,163,667 1,065,025 1,278,958,104 Property Tax 31,557,087 29,289,945 33,648,810 38,678,504,789 User Fees 21,975,206 20,931,123 29,004,195 34,058,325,346 Licenses 6,564,179 15,559,527 8,807,180 11,036,713,569 Others 43,478,222 43,481,781 56,041,713 57,837,328,767 Total 111,045,327 117,541,410 148,483,957 153,003,604,321 Source: Audited Final Accounts. Note: Although this report is for FY2014/15, the performance of local revenues is not reflected because the final accounts were still being analyzed. 8 Local Government Final Audited Accounts 24

3.3 Technical Support for Property Rate Collection During the financial year under review, the Commission continued to provide technical support in the collection of property rates to 36 urban LGs. Property rate is one of the major sources of local revenue for local governments but performance indicate an under collection currently only at 23% of the estimated potential. LGFC established that poor collection of property rates in local governments is mainly due to administrative weakness. The technical support therefore focused on strategies to improve the compilation of property registers, valuation rolls and collection methods. The objective of the activity The objective of the intervention of providing technical support was to improve the performance of property rates for the local governments. The specific objectives were to: i) Assist urban councils in the identification of uncollected revenues from property rates, ii) Assist LGs in developing new and update property rate registers and valuation roll iii) Sensitizing LGs on the legal requirements for preparing and issuing demand notes; iv) Build the capacities of LGs in property rate administration A total of 36 9 urban local governments were supported. The participants included a cross section of officers and elected leaders including Town Clerks, Head of Finance, Accounts Assistants, Town Agents, Enforcement staff, Chairpersons LCIII and Secretaries of Finance. 3.4. Challenges facing Local Governments during the implementation The Commission documented the challenges faced by the local governments in the administration of property rates collection. They include the following: i) Enforcement mechanisms in the collection of property rates are very weak ii) A number of unban council are not regularly updating their valuation rolls hence some ratable properties are not on the valuation rolls; iii) The cost of updating valuation roll is very high. iv) Misinterpretation of the Local Government (Rating) Act 2006 as amended, and in particular section (4) of the Act where Councils believe that the Valuation roll expires after five years of their approval while others Councils (most rural urban councils) that do not know the procedure for collecting property rates. v) None payment of property rates on central government properties to LGs by Uganda Land Commission. 3.5. Actions taken by the Commission on the above challenges included: i) The Commission facilitated teams of technical Staff to follow up on the implementation of property rate collections in the 36 supported urban Councils. ii) Town Councils have been encouraged to institute Development Forums with representation from NGOs, Civic and Opinion Leaders and other stakeholders whose 9 Kasilo TC, Migeera TC, Kakumiro TC, Rwebisengo Tc, Lwakhakha TC, Otuke TC, Rubaare TC, Mpondwe TC,Katooke TC,Kaberebere TC,Kakooge TC,Kijura TC, Karugutu TC, Kalungu TC,Kibingo TC, Mateete TC,Ngoma TC, Namayumba TC, Yumbe TC, Maracha TC, Buyende TC, Bullissa TC,Isongoro TC, Buikwe TC,Patongo TC,Agago TC, Ayer TC,Kabuyanda TC, Katerera TC, Bukomero TC, Ntwetwe TC, Rwashamaire TC, Kitwe TC, Nsiika TC, Abim TC and Butemba TC 25

role would be to advise the Town Council on how best it could mobilize and raise local revenue iii) The Commission in liaison with MoLG provided LGs with the regulations for property rate collection to support them in their work. 3.6. Conducting Local Revenue Enhancement Committee Meetings The Committee was established in 2002 to coordinate policy dialogue on local revenue enhancement activities in the country. The objective of the Coordinating Committee is to provide a forum for key stakeholders dialogue on issues that would enhance the capacity of local governments to mobilize, generate and manage sustainable local revenues efficiently and effectively through co-ordination of decision-making. Composition of the Committee The Committee chaired by the Commission is composed of different stakeholders who include: United Nations Capital Development Fund representing the donor community; Ministry of Local Government; Ministry of Finance Planning and Economic Development (Tax Policy department); ULGA, UAAU; Ministry of Lands, Housing and Urban Development (Office of the Chief Government Valuer); Uganda Revenue Authority (URA); Kampala Capital City Authority (KCCA); Representative of Attorney/Solicitor as an exofficio; and Local Governments representatives. Activities carried out During the year under review, the Commission facilitated three policy dialogue meetings in which the following was done. i. Reviewed the legal provisions for local revenue management in local governments and tasked the Commission to submit the proposals to the Hon. Minister of Local Government ii. Recieved and discussed progress on the USMID programme in terms of targets and funding levels; iii. Discussed and made recommendations on the implications of the revoked Cess on produce Licensesand iv. Management of vehicle parks and markets. v. Discussed the establishment of fiscal databases and challenges in database management in local governments and made recommendations. 3.7. Recommendations made i) Local Revenue registers both in hard and soft copies generated from the data base should become one of the performance criteria for LGs in the National Annual Assessment Tool. ii) Ministry of Finance Planning and Economic Development should provide LG further clarification on VAT waiver on construction materials iii) An appropriate name should be identified for the charges levied on contracts and forward it to the Hon. Minister for Local Government for guidance. iv) Revenue that would be lost by LGs as a result of the revoked licenses and Cess on produce should be computed and communicated to the Ministry of Local Government for possible compensation. 26