Local Revenue Mobilization Frameworks Final Report

UN JOINT PROGRAMME ON LOCAL GOVERNANCE AND DECENTRALISED SERVICE DELIVERY (JPLG) IN SOMALIA PUNTLAND STATE OF SOMALIA Local Revenue Mobilization in Somaliland, Puntland and the Federal Government of Somalia (FGS) Local Revenue Mobilization Frameworks Final Report Report By: Kandole B. Patrick kandles2009@gmail.com +256-772-409-113 or +256-752-409-113 26 th June 2015 Page 1 of 46 PUNTLAND STATE OF SOMALIA LRMI Frameworks Final Report

Contents FOREWORD... 3 ACRONYMS... 5 EXECUTIVE SUMMARY... 6 1. BACKGROUND... 8 2. ASSIGNMENT OBJECTIVE... 8 3. KEY EMERGING ISSUES FROM MISSION... 9 4. LEGAL AND POLICY FRAMEWORK CHALLENGES... 10 CONCLUSION OF LEGAL FRAMEWORK... 12 5. ENUMERATION AND REGISTRATION... 12 CONCLUSION OF ENUMERATION AND REGISTRATION... 13 6. ASSESSMENT AND BILLING... 13 CONCLUSION ON ASSESSMENT AND BILLING... 14 7. SENSITIZATION, CUSTOMER CARE AND PUBLICITY... 14 CONCLUSIONS ON SENSITIZATION, PUBLICITY AND CUSTOMER RELATIONS... 15 8. OSR COLLECTION PERFORMANCE AND MONITORING... 15 CONCLUSIONS ON COLLECTION AND MONITORING... 19 9. RECORDING, AUDIT AND ACCOUNTABILITY... 21 CONCLUSIONS ON RECORDING AND ACCOUNTABILITY... 21 10. REVENUE ADMINISTRATION- WHAT WORKED AND QUICK WINS... 23 11. LOCAL REVENUE MOBILIZATION MANUAL AND GUIDE... 24 12. TRAINERS MANUAL AND GUIDE... 25 13. WORKSHOPS... 27 14. THE LRMP CONCEPT... 28 15. DEVELOPMENT APPROACH FOR LRMP... 29 16. SAMPLE LRMP... 31 17. REVENUE PERFORMANCE PROJECTION 2015-2019... 32 18. REVENUE MOBILIZATION ACTION PLAN (R-MAP)... 33 19. R-MAP SAMPLE FORMAT- COLLECTION AND MONITORING... 35 20. GOING FORWARD-NEXT STEPS... 36 21. CONCLUSION... 37 22. APPENDIX 1: DOCUMENT REVIEW... 38 23. APPENDIX: 2 PUNTLAND -FIELD CONSULTATIONS ATTENDANCE LOG SHEET... 39 24. APPENDIX 3: CLASSIFICATION OF LOCAL REVENUE SOURCES... 41 25. ANNEXTURE ONE: SUMMARY OF FIELD MISSION EMERGING ISSUES... 42 Page 2 of 46 PUNTLAND STATE OF SOMALIA LRMI Frameworks Final Report

Foreword The local revenue situation in Somalia has started an upward trend after many years of low performance. However, the revenue levels are still below the desired levels to adequately fund the cost of decentralized services. The concept of decentralization implies a legal obligation on municipalities to strive to enhance revenues and utilize the sources to finance service delivery within their budget. The JPLG-UNCDF has partnered with the Ministries of Interior and Federalism (MoIF) and the Ministries of Finance in the respective regions to provide technical support to the Local Revenue Mobilization Initiative (LRMI). The overall goal of the Initiative is to improve revenue generation at the local level and promote better service delivery and local development through a more effective and efficient revenue administration. This phase of the Revenue Mobilization Initiative is to support development of Local Revenue Mobilization Plans [LRMP] and a Revenue Mobilization Action Plans [R-MAP] as a follow up action on the Local Revenue Mobilization in Somaliland, Puntland and the Federal Government of Somalia (FGS), Draft Proposal Framework April 2014. Insufficient revenue generation is most commonly the result of a combination of factors, including; tax base [what to be taxed], tax coverage [who is paying and how much], tax assessment [basis of tax determination], Collection effectiveness, [how much of billed is collected], collection efficiency [cost of collection per shilling] payment procedures and weak human resource factors. Developing a LRMP implies that the regional and district governments in Somalia are making a commitment to putting in place a wide-ranging series of improvements to its policies, procedures, staffing and organizational structure that impacts on revenues and service delivery. The R-MAP approach is to have implementation in three phases, Short, Medium and Long Term where the short term, 0-6months, will be to focus on delivery of early results by initially looking Page 3 of 46 PUNTLAND STATE OF SOMALIA LRMI Frameworks Final Report

at quick win situations. The short term strategy will be to target what is perceived as collectable and receivable. Support for development of comprehensive R-MAPs was through workshops for Puntland. This intervention will require further support by coaching and mentoring staff in respective regions to come up with a more holistic LRMP and R-MAP by the close of 2015. To ensure appropriate accountability, an internal Audit manual and guide will be required to support the accountability and oversight function within local governments. Page 4 of 46 PUNTLAND STATE OF SOMALIA LRMI Frameworks Final Report

Acronyms AIMS ALGA BIMS CEO CFO CIA CSOs FGS GIS IFMS ILO IR JPLG LGs LGs LRMP LGRMP MoF MoI MoIF OSRs RIP R-MAP UNCDF UNDP Accounting Information Management System Association of Local Governments Billing Information Management System Chief Executive Officer ( Executive Secretary) Chief Finance Officer Chief Internal Auditor Civil Society Organizations Federal Government of Somalia Geographic Information System Integrated Financial Management System International Labour Organisation Inception Report Joint program for Local Governance in Somalia Local Governments Local Governments Local Revenue Mobilization Plan Local Government Revenue Mobilization Plan Ministry of Finance Ministry of Interior Ministry of Interior and Federalism Own Sourced Revenues Revenue Improvement Plan Revenue Mobilization Action Plan United Nations Capital Development Fund United Nations Development Program Page 5 of 46 PUNTLAND STATE OF SOMALIA LRMI Frameworks Final Report

Executive Summary The underlying intent of the Puntland mission study in February to March 2015 by UNCDF was to identify issues that will inform the development of Revenue Mobilization Manual and Guide, support development of LRMP/R-MAP and to conduct workshops for training of trainers in preparation for a roll out of training in all target districts. Furthermore these findings will support the development of an internal audit manual and guide. The key challenges identified by the mission centered on (1) low revenue base due to the level of economy and poverty (2) Low collection efficiency where all that is billed is not collected (3) low capacity in terms of equipment and personnel (4) low willingness to pay due to low downward accountability and lack of awareness (5) the legal framework is not enabling enough especially during times of collection enforcement (6) charging services below market cost and generally unrealistic tax tariff rates, (7) a weak internal audit and oversight function. These challenges are exacerbated by low capital investments into visible services and poor accountability. The UNCDF has had a series of interventions aimed at increasing service visibility as a support mechanism for promoting willingness to taxes. The merging issues from the mission informed the development of Revenue Mobilization Manual and Guide on which basis the workshops were held. The key workshop outputs was support for the development of LRMP and R-MAP including skills transfer for personnel who will participate in the roll out training. A manual for Trainers who will participate in the roll out training had also been developed. The workshops held during May and June 2015 conclude that the most crucial next step actions should involve the following; (1) Roll out of training (2) development of LRMP/R-MAP focusing on what has been tested, on initiatives that will easily be supported politically and are administratively feasible (3) Review of Tariffs structure and related legal framework 1 (4) review organization service structure (5) develop accountability and Internal Audit Manual (6) Training and Skilling of the Internal Audit and Oversight function (7) Complete the Municipal Finance Policy (8) budget guidance and cost rationalization (9) communication strategy (10 PPP strategy 1 Review of legal framework is on-going in Puntland and it is expected that it will be will be complete by January 2016 Page 6 of 46 PUNTLAND STATE OF SOMALIA LRMI Frameworks Final Report

A sound revenue system is essential and serves as a crucial tool for the successful running of local government. The Municipal Finance Policy must therefore be augmented with development of Accountability and Internal Audit Manuals and eventually the Finance and Accounting Manual and regulations. Quality recording and accountability may be difficult in the absence of computerized systems for revenues, budgeting and spending. One of the key assumptions in the overall LRMI frameworks is that the people and governance of target local governments are able and willing to make the necessary effort to increase the revenue levels, and to undertake all administrative measures within an appropriate time framework. And that the local governments will have a professional, well empowered and liable administration with improved financial capacity, strong internal audit and accountability function. Page 7 of 46 PUNTLAND STATE OF SOMALIA LRMI Frameworks Final Report

UNCDF-LRMI PROGRAM 1. Background The UN Joint Program on Local Governance and Decentralized Service Delivery (JPLG) in Somalia is a joint program of ILO, UNCDF, UNDP, UN-HABITAT and UNICEF. The program has determined that revenue mobilization at the local level will have a marked impact on the key objective of improvement in good governance, and equitable priority service delivery in selected locations. Furthermore, local revenue mobilization has the potential to foster peace through increased political and administrative accountability by empowering communities, and betterment of service delivery. For a futuristic Somalia under decentralization, the motivation for increasing revenue volumes and the effective accountability is a key success factor for good governance and equity. The UNCDF, on behalf of JPLG, in partnership with the Ministries of Interior and Federalism (MoIF) and the Ministries of Finance in the respective regions to provide technical support to the Local Revenue Mobilization Initiative (LRMI). The overall goal of the Initiative is to improve revenue generation at the local level and promote better service delivery and local development through a more effective and efficient revenue administration. There is evidence that the coast line and other areas within Puntland are endowed with minerals, emeralds, gas and Oils, which are a potential for future local government revenues through Royalties. 2. Assignment Objective The key result area for this assignment was to develop a LRMI framework manual and guide and further provide supporting skills for development of Local Revenue Mobilization Plan [LRMP] and Revenue Mobilization Action Plan, [R-MAP] as a follow up action on the UNCDF-Local Revenue Mobilization in Somaliland, Puntland and the Federal Government of Somalia (FGS), Draft Proposal Framework, April 2014. Page 8 of 46 PUNTLAND STATE OF SOMALIA LRMI Frameworks Final Report

This objective has been accomplished through; (1) conducting a fact finding mission (2) development formulation of a Revenue Mobilization Manual and Guide (3) development of a trainers manual and Guide (4) conducting workshops to provide skills to staff who will participate in the roll out training. 3. Key Emerging Issues from Mission The state of revenue mobilization depends on the economic environment of the targeted regions, Puntland. Puntland has a combined population of about 4,284,633 2 persons, with over 34% resident urban areas, while rest is rural-nomadic. Recent surveys indicate that about 73% of the population is living in poverty worsened by high unemployment levels. 3 The overall economy is underpinned by the livestock sector, estimated to contribute 60% of GDP. The population engaged in economic activities is minimal and by implication, there is low taxable capacity from individual incomes and wealth. Nationally the situation is made more complicated considering that the population growth rate estimated at 3.14%, which may have the consequence of ever increasing demand and pressure on the already strained social services. The Local revenue mobilization situation is therefore becoming more urgent as a means to provide and deliver the much needed services at a micro level. The UNCDF mission was conducted during the Months of March and April 2015 and generically identified major bottlenecks in the revenue administration process. The Revenue administration process has the following reference points (1) Legal and Policy framework (2) Enumeration and Registration (3) Sensitization and Publicity (4) Assessment and Billing (5) Collection and Monitoring (6) Recording and Accountability. The challenges are exacerbated by low capital investments into visible services and poor accountability. The UNCDF has had a series of interventions aimed at increasing service visibility as a support mechanism for promoting willingness to taxes. 2 Puntland Ministry of Planning 27 th May 2015, but still contested, earlier estimates were 2.5m 3 Somaliland sector functional assessment report 2012 Page 9 of 46 PUNTLAND STATE OF SOMALIA LRMI Frameworks Final Report

4. Legal and Policy Framework challenges (1) All the regions operate a decentralized system of governance which allows a level of discretion in revenue administration at the local level. The centre provides remittances under the fiscal decentralization process; these are different for each region. (2) The amount of funds transferred to LGs by the Centre has no relationship with services rendered 4 except in the case of Counterpart funding for Donor funds. There is also no linkage to the levels of revenues a LG is able to collect. (3) There is no discernable trend in the level of grants transferred as this depends on the level of revenues raised by the centre. (4) Local tax tariffs are approved by the Ministry of Interior on application by the LG Councils. The last known approved tariffs are dated 2009 and are extremely out of the current economic reality. LGs are charging different rates according to their own assessment and generally not following any nationally set guidelines currently. (5) Puntland State of Somalia has an on-going review of the legal framework and Tariffs structure which may be complete by January 2016. This is a costly and skills consuming exercise which may require support of the UNCDF. It hoped that the other parts of Somalia will emulate the Legal framework review in Puntland. (6) There are no specific laws to govern specified revenue sources which create complications during assessment and payment enforcement. (7) The legal framework 5 lists the revenue categories that may be collected by designated local governments. The range and powers on revenues to be collected are based on grading of Local governments; they are divided into four grades, A to D, where A designates the capital of each region with more powers to collect revenues, while districts are graded from B to D with a smaller range of taxes assigned to them. LGs in Grade 4 The Somaliland government provides 12.5% of national budget as transfers to LGs while Puntland provides for 2.5%. Municipalities hosting a sea Port get in addition a direct share of customs duty at 10% and 2.5% in Somaliland and Puntland respectively 5 Law No.7 issued in 2003 lists all Lag revenues. Law no.3 & 12 Regions and districts administration, and Puntland Taxation framework 2014 Page 10 of 46 PUNTLAND STATE OF SOMALIA LRMI Frameworks Final Report

are more endowed and fund their total budget to more than 70% in most cases, while the lower grades depend much more on transfers from the centre 6. (8) The existing administrative law provides Local governments with more than Twenty (20) Own Source Revenues (OSRs), which the mission has for ease of reference divided into four major categories (1) Livestock based Taxes (2)Land based taxes (3) User fees and Charges (4)Business License. A number of Low remuneration may also these revenues are not yet implemented by create temptations for fraud some LGs due to lack of clarity in the law and irregularities. This which assigns them to levels of government, increased risk call for urgent the centre and LGs. formulation of monitoring tools (9) There is no coordinated Human resources and internal audit manuals and policy framework that spells out the guide. structure, responsibilities and pay structure for LG staff. Low remuneration is said to be a disincentive for revenue collectors and consequently a low yield. Low remuneration may also create temptations for fraud and irregularities. This increased risk call for urgent formulation of monitoring tools and internal audit manuals and guide. (10) Lack of clarity in the legal framework in respect to revenue responsibilities, specifying who sets rates, who collects and who retains which source, and what level of rates?. (11) Local revenues such as Property tax, Markets, street parking, agricultural taxes. do not have enabling laws to guide assessments, valuation and enforcement systems. The absence of a law on taxation of municipal property has made prosecution of defaulters more difficult. Neither Garowe nor Gardo for example, has had any significant cases of prosecution of tax defaulters, despite many default cases, and the case is similar in all municipalities in Puntland. Obscurity within the law encourages political interference, opens doors for corrupt tendencies and default with impunity. 6 Overall municipalities in grade A contribute more that 70% of total budget from OSRs. Bossaso a larger percentage in central government grants due to the additional share from the Port Authority. Gardo is a grade C local government and therefore more dependants on CG grants. Page 11 of 46 PUNTLAND STATE OF SOMALIA LRMI Frameworks Final Report

(12) The enforcement mechanism of removing or locking main doors without judicial authority has proved unpopular and besides it has no legal backing. Conclusion of Legal framework For better implementation, all (1) The absence of a relationship between revenue initiatives must be transfers and local revenue collection may backed by a specific legal be a disincentive, especially where the framework, a law for property transfers are significant as in the case of tax, Royalties, Business and Bossaso. land. (2) Approved revenue sources that are approved by Law but not yet implemented should be collected as soon as practicable. (3) Tariffs that are out of touch with the economic reality must be reviewed as an immediate short term action. (4) A transfer formula should be worked out to have a reference weight to local revenue mobilized as a percentage of potential revenues. (5) The LDF should include revenue in the performance criteria and provide incentives. (6) Low remuneration and skills is having an impact on the morale of revenue monitors and collectors. (7) For better implementation, all revenue initiatives must be backed by a specific legal framework, a law for property tax, Royalties, Business and land. (8) Collection of revenue arrears is difficult to enforce in the absence of specific legal framework on Property Taxes and other revenues 5. Enumeration and Registration This process involves identification and registration of tax objects and individuals in a computer based medium or hard copies of registers. Registers should show name of tax payer, location, income liable for taxation, type of tax Page 12 of 46 PUNTLAND STATE OF SOMALIA LRMI Frameworks Final Report

(1) Whereas the GIS and business registration have improved on the records, there is still a challenge in the GIS for property. The records contain some property that is exempt, however, attempt to isolate this are underway in Puntland. (2) There is insufficient logistics in terms of transport and stationary and human capital Conclusion of Enumeration and Registration (1) GIS should be verified physically with a door to door task force so that the real taxable property is on the roll. (2) Train enumerators and data entry clerks (3) Provide computers and stationary in a timely manner. 6. Assessment and Billing This process involves determining the taxable income or wealth income basing on approved transparent criteria or tariff structure. (1) The assessment criteria especially for business licenses and land are still underdeveloped. In Garowe the process for assessment of trading licenses is not well refined and is exposed to costly loop holes 7. Assessment is based on value of goods in the shop at the time of assessment! (2) There are no assessment committees which are representative and there is no evidence of an appeals system except for reference to the Mayors. (3) The absence of comprehensive street nomenclature has often delayed distribution of bills and therefore leading to revenue arrears build up. (4) The levels of poverty, deprivation and unemployment are high in the region and this creates special problems in bringing a larger population to pay for the cost of service delivery. (5) Enforcement of compliance to pay is increasingly difficult because of the socio-political environment. There is widespread inequity and unfairness in assessment; this perceived unfairness may result into quite resistance to pay. 7 The highest license id about USD 150 per year and the lowest is USD 30. Assessment is based on value of stock displayed in shop Page 13 of 46 PUNTLAND STATE OF SOMALIA LRMI Frameworks Final Report

(6) A large number of the population are engaged in informal trade, vending water on donkey drawn trolleys road side Quat kiosks, roadside food stalls and all these present a problem in taxation because they are mobile and have no business records that can be used for tax assessment. (7) The tax tariff rates are considerably extremely low and out of step with the economic reality. In Garowe, Property transfer tax of 2% is based on cost value rather than the market value. Land premium for new plots of land is an average shs 1000-2000 8 as a one off payment. (8) Inappropriate valuation and assessments methods especially for land based taxation. There is widespread inequity and unfairness in assessment, for example, a plot of land in Garowe which measures 40metres by 60 metres is levied shs 140,000 irrespective of location, gifted property is exempt from transfer tax, and residential property is rated at shs 80 while commercial property is rated at shs 140 per square meter irrespective of location. This perceived unfairness may result into quite refusal to pay. (9) The GIS shows property but in a majority of cases has not been able to classify exempt and non-exempt property and this could have the effect of indicating higher revenue potential than would be the case if there was valuation on only taxable property. 9 Conclusion on Assessment and billing Unstructured assessment systems may result into low capture of tax objects and lower than expected revenue volumes. The absence of an appeals tribunal may create challenges for fairness and transparency in assessments which may result into tax payer apathy and resistance 7. Sensitization, Customer Care and Publicity This involves activities that lead to tax payer buy-in, acceptance to pay and hence reduction of resistance to pay with an overall result of reduced administration costs. Specific activities include holding sensitization workshops and seminars for revenue collectors. Taxpayer awareness campaigns on the importance of tax payments. Outputs may be radio programs, talk shows, drama. 8 USD=20,000 shs 9 This matter was brought to the attention of HABITAT during discussions and there is a review that will take care of this challenge. Page 14 of 46 PUNTLAND STATE OF SOMALIA LRMI Frameworks Final Report

(1) This generally is not done on a comprehensive and structured basis although some municipalities such as Gardo, Garowe have increased publicity using bill boards and radio programmes and drama. (2) There is no structured mechanism for publication of where resources come from and where they go. However, Hergeisa intends to start a magazine and newspaper to inform residents about resource use and encourage revenues payments. Conclusions on Sensitization, Publicity and Customer Relations Arising from the observations above, the following conclusions which will in turn inform the development of the R-MAP and LRMP have been adduced; (1) More action to improve on tax payer convenience so they don t travel long distances in order to pay taxes (2) Introduce direct payments to the bank (3) The mayor may be overwhelmed with complaints from defaulters. Therefore it may be effective to establish a mechanism for receiving and handling public complaints (4) Creation of a one stop centre or a complaints box will go a long way to reduce congestion at the Mayors and Executive Secretaries Offices (5) Develop a communication strategy championed by the MoIF (6) Holding regular consultative meetings may reduce taxpayer apathy and collection costs 8. OSR Collection Performance and Monitoring Collection involves activities involved in receiving revenues from taxpayer with a focus on systems and procedures for ensuring adequate security and controls form any fraud. Monitoring on the other hand involves activities, procedures, processes and methods used to ensure that local government have enough revenues to finance their commitments. A process that involves ensuring that bills are correct, issued to the right persons, collected and accounted for. (1) Business and property Revenue is gaining significance especially due to the actions of ILO and HABITAT respectively. (2) Municipalities such as Bossaso have a large percentage of the budget funded by direct sharing of customs revenues 10 including a share of export taxes for livestock from these ports. Bossaso receives 2.5% of customs duty on livestock. disincentive to evolve new revenues in the long run. This may become a 10 The share is paid to the municipalities after every two days. Page 15 of 46 PUNTLAND STATE OF SOMALIA LRMI Frameworks Final Report

A% SHARE (3) There has been significant growth in revenues especially in cases where there has been a change in the tariff rates and better billing system, a case for Gardo and Garowe in Puntland. (4) Local revenue contribution to total budget is significant in municipalities averaging over 70%. Different revenue categories have varied significance between the regions. Diagram 1: Revenue Category contribution in total OSRs 2014 shows the significance of different revenue sources in the total budget, a reflection of opportunities and endowment. (5) Some tax payers evade taxes because they are not sensitized on the importance of paying taxes. There is minimal involvement of political leaders in promoting revenues especially property and business revenues. (6) Low staff capacity in terms of skills and tools and low pay for revenue collectors (7) Low logistics in terms of transport and data management. Computers are in short supply. (8) There is no well facilitated monitoring function. (9) Insufficient compliance audit of revenue by either the MoIF or the Auditor General. Diag. 1: Revenue Category contribution in total OSRs 2014 - PUNTLAND 60% 50% 40% 30% 20% 10% 0% Livestock taxes Land based User Fees and Business taxes Charges Licenses Garowe 10% 52% 23% 16% Gardo 22% 25% 30% 23% Galkacyo 32% 16% 11% 41% Source: Consultant Analysis of Secondary Data: Respective LGs Page 16 of 46 PUNTLAND STATE OF SOMALIA LRMI Frameworks Final Report

(10) The diagrams shows that Business and Land Taxes contribute on average is 60% of the total Own Sourced Revenues (OSRs). The significance of the sources appears to be on tax objects that are difficult to hide and more related to immediate earning of income especially for animals in the market and immovable property. The local governments also indicated that their major revenue sensitization focused on wealth in terms of animals, land and buildings. Whereas there appears an opportunity to raise more revenues from land taxes in the urban areas, there is still a state of low business activity especially in lower grade local governments and impoverishment 11. Monitoring and involvement of (11) Monitoring and internal audit is weak and this may involvement of internal audit be the underlying cause of low is weak and this may be the collection returns in many cases. underlying cause of low collection returns in many cases. (12) OSRs growth trends varied widely from 244% for land based taxes to 7% for commercial licenses, averaging at 51% overall growth between 2013 and 2014. Diagrams 2: OSRs Growth Rates 2013-2014, shows how each category faired in target local governments. 11 A quick survey within the Gardo and Garowe shows many old structures and a generally impoverished resident population. The mission visited markets and witnessed a very low tempo of business activity. The urban areas in Puntland show severe signs of deprivation and rundown buildings. Page 17 of 46 PUNTLAND STATE OF SOMALIA LRMI Frameworks Final Report

Axis Title % OSRs Growth Diag. 2 OSRs Growth Rates 2013-2014 Puntland 140% 120% 100% 80% 60% 40% 20% 0% -20% Garowe Gardo Galkacyo average Livestock taxes -8% 13% 21% 9% Land based taxes 72% 11% 122% 69% User Fees and Charges 107% 19% 23% 50% Business Licenses 93% 41% 19% 51% Source: Consultant Analysis of LG Secondary Data Diagram 3: Relative Importance of OSRs in Total Budgets 2014, below gives a graphic representation of the relative importance of OSRs within the total budget. Diag. 3: Individual OSR share of Budget 2014 60% 50% 40% 30% 20% 10% 0% Livestock Land User fees Licenses Garowe 9% 51% 22% 15% Gardo 14% 15% 18% 14% Galkacyo 32% 15% 11% 41% Page 18 of 46 PUNTLAND STATE OF SOMALIA LRMI Frameworks Final Report

% Contribution Diagram 4: Total share of OSR in total budget 2014 illustrates the relative importance of total OSRs in financing the budget 2014. Diag.4 Importance of OSRs in Total Budget 2014 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Garowe Gardo Galkacyo OSRs 97% 61% 99% External funding 3% 39% 1% Source: Consultant Analysis of LG Secondary Data Conclusions on Collection and Monitoring Arising from the observations above, the mission makes the following conclusions which will in turn inform the development of the LRMP. (1) Any significant financing for service delivery will depend on the effectiveness of OSRs mobilization initiatives and therefore the success of the LRMP and R-MAP is critical. (2) Opportunities for revenue impact on the overall Any significant action to budget are from property [wealth] and business. improve revenue (3) High levels of poverty diminish opportunities management must address for more revenues. Initiatives to tackle poverty the criteria for adjustments and enterprise growth such as LED should be in tariff rates as an initial part of early actions step and quick win. (4) Land and user fees present better opportunities for faster revenue growth and improvement due Page 19 of 46 PUNTLAND STATE OF SOMALIA LRMI Frameworks Final Report

to the elastic nature of the source. Therefore initial focus should be on land based taxes and user fees, including new sources in fees (5) Property and livestock taxes are the most prominent source of revenues in all regions, with livestock revenue although less prominent in Puntland. (6) The reason for growth in municipalities such as Gardo is due to an increase in Tariffs. By implication this makes the revision of the tariffs which are currently too low and meaningless in some cases as a quick win which must be pursued in the short run R- MAP. (7) The non collection of some approved revenues has distorted the performance ranking especially in user fees and business licenses. All revenue sources as approved should be implemented without delay. (8) Property tax and business tax have a higher acceptability rate and therefore a higher opportunity for collectability. Improvement action will be better based on these sources. (9) Livestock revenue is less significant in the Puntland region so the focus should be on property and business especially in municipalities such as Bossaso and Garowe. (10) Any significant action to improve revenue management must address the criteria for adjustments in tariff rates as an initial step. (11) Better revenue related data capture and management such as BIMs and AIMS has a significant resultant impact on out-turn (12) There is a need to develop revenue monitoring tools (13) Develop internal audit manuals and procedures focusing on revenues (14) Develop systems of enforcement that will ensure compliance, prosecution and controls Page 20 of 46 PUNTLAND STATE OF SOMALIA LRMI Frameworks Final Report

9. Recording, Audit and Accountability Recording refers to activities that will result into showing where the money came from and where the money went. Taxpayers need downward accountability where revenue is linked to services delivered. The LDF is one tool that will enable increased service visibility and hope fully increasing tax payer willingness to pay. Therefore the process of auditing, creating an assurance that all is well is another critical factor in revenue mobilization. Linking services to revenues must be seen to done and not merely said. The emerging issues are; (1) No systematic regular reporting, analysis and discussion of revenue performance by council on a regular basis. (2) There is a skills gap in the internal Audit and oversight function and no adequately trained internal auditors. (3) The external audit reports are not annual as would be desired (4) There is an absence of a monitoring system and tools for such a function (5) The court system as a means to enforce payment is seldom used, either because of the absence of a relevant framework or due to human weakness. 12 (6) Absence of policy for enforcement of tax compliance- Aggressive enforcement methods such as removal of doors in the event of failure to pay may alienate taxpayers and could have a political back lash! Conclusions on Recording and Accountability Arising from the observations above, the mission concluded that there is a need for increased focus on activities that promote transparency and accountability. Showing where the money comes from and where the money goes in terms of visible services and information on all aspects of LG operations. 1) There is a general perception that service visibility is low 13 except for some recent infrastructure work under donor funding although the decentralization policy requires at least 40% of OSRs to be spent on investments. 12 There has not been rigorous enforcement because some senior staff believe that residents are poor and unemployed. 13 Mayor of Gardo. Page 21 of 46 PUNTLAND STATE OF SOMALIA LRMI Frameworks Final Report

2) A participatory budgeting process is at low key and this denies the population a direct linking of revenues to services rendered. 3) There are no public accounts committees to follow up audit and monitoring queries creating an opportunity for irregularities. 4) Data on approved revenue sources is either absent or not updated regularly 5) Registers on potential payers not updated especially property owners although a set of books is available 6) Internal audit staff is unqualified and poorly facilitated where they exist. They have a general basic training of secondary school level. 7) Reports and budget are not displayed for the community and other stakeholders. 8) In order to have a holistic and more structured attention to the emerging challenges, development of a Participatory Revenue Mobilization Action Plan is critical in order to have a measurable monitoring process and management of the challenges. 9) Whereas the trends in shilling amounts appear to be on the increase, weakness in monitoring and audit creates an opportunity for revenue leakages. This perception of weakness in monitoring and leakages is shared by both the centre and Municipality. 10) Establishment of an internal audit function and design of internal audit manuals is critical 11) More support and planning for a communication strategy on revenues is critical 12) New laws to cover new revenues such as royalties, use of beaches and user fees based on recovery of full marginal cost are a necessity And in order that accountability is part of this LRMP, preparation of internal audit manuals and guides including some training will be a critical success factor for the consequent R_MAP. In the meantime, the Habitat is developing a Municipal Finance policy document which will institutionalise some of the agreed actions through training sessions. Page 22 of 46 PUNTLAND STATE OF SOMALIA LRMI Frameworks Final Report

10. Revenue administration- what worked and quick wins Summary and analysis of key emerging issues. (1) Increase in tariffs in user fees, livestock and land tax. Tariff on land was changed from the previously fixed amount to a tariff based on area of the land and space occupied by a building. The market value for land transfer fees was changed from cost value to market value. Whereas the tariff is still very low, a small change creates a significant impact in revenue growth. The overall concept and effect is to increase revenues moderately from similar number of tax objects. The changes may appear negligible but create a significant effect from the volume of transactions. However, these adjustments require tacit approval by the MoIF in accordance with Law 7. 14 (2) Better data management especially in the case of property tax which has to a significant degree been supported by HABITAT with the GIS. The use of the GIS and BIMS developed under HABITAT is said to have provided the much needed data although the full exploitation has not been experienced. Gardo and Garowe in Puntland are yet to take full advantage of the BIMs for both Business licenses and property tax. (3) Structured sensitization of communities by the political leadership and staff. Municipalities such as Gardo have a community sensitization program on revenues although it is not well funded and not done on a regular basis. ILO has funded some revenue awareness campaigns using media and bill boards. (4) Reduced political interference in matters of revenue management. All municipalities consulted indicated that the political leaders do not interfere with revenue collection. And almost always the tariffs set and approved by councils are endorsed by the Ministry of Interior. The Office of the Decentralization Champion in all the regions, has been very supportive and more especially so since it is directly under the office of the Vice President. (5) Introduction of new tax initiatives. On average not all the revenue types indicated and approved under the laws have been implemented. Some municipalities have not only gradually 14 The Law allows for reductions and not increments unless specifically approved in writing by the Centre. Page 23 of 46 PUNTLAND STATE OF SOMALIA LRMI Frameworks Final Report

introduced these neglected sources, but are venturing into newer areas. Land premium is another newly introduced revenue source and is charged in some municipalities such as Garowe. (6) Collection effectiveness is highest in property taxes because there is a record against which measurement can be done. Whereas there is a growth of over 100% in user charges in Gardo Municipality, it is difficult to develop an opinion on whether this is a good performance or not unless the potential is fairly estimated.. (7) Staff remuneration and motivation is varied between municipalities and there are loud complaints about the disparity. Garowe offer incentives to collectors and this has shown collection improvements. 11. Local Revenue Mobilization Manual and Guide The LRMI Manual and Guide will support all levels of Lgs in acquiring new skills in revenue mobilization processes and to acquaint themselves with the best practices in revenue mobilization. Furthermore, the guide will enable a structured implementation of revenue initiatives; support development of LRMPs and R-MAPs which is critical to the overall revenue mobilization process in the short and long term time framework. This guide aims to support the LRMP and R-MAPs through enabling staff and politicians to achieve the following; 1) Identify and understand the importance the major sources of LG revenues 2) Describe the procedures for revenue policy, sensitization, assessment, collection, recording, monitoring and accounting 3) Explain the roles of the stakeholders involved in mobilization of revenue and particularly the implementation of the LRMP and R-MAP 4) Acquaint staff and politicians on the need for performance measurement and reporting The LRMI Frameworks Manual and Guide will support all levels of LGs in acquiring new skills in revenue mobilization processes and to acquaint themselves with the best practices in revenue Page 24 of 46 PUNTLAND STATE OF SOMALIA LRMI Frameworks Final Report

5) Identify best practices and experiences in revenue mobilization 6) Share other international experiences in revenue mobilization The manual and guide is arranged in three sections and covers the following discussion issues. (1) Local Revenue Mobilization concept (2) Rationale for revenue mobilization (3) Categories of OSR, meaning and legal framework (4) OSRs Performance analysis for 2013 and 2014 in target LGs in Puntland (5) OSR Administration Processes, challenges and solutions (6) OSR administration best practices (7) Principles of a good revenue system (8) Identification and evaluation of a new revenue source (9) Development of a LRMP and R-MAP (10) OSR monitoring concept (11) Revenue Collection Targets (12) Control Systems (13) Performance Measurement process (14) Performance monitoring Reports (15) Administrative and political accountability- ensuring transparency (16) Projection of priority expenditure-linking revenues to services (17) Other international experience Annexure to the manual include illustrations and diagrams for revenue analysis, LRMP and R- MAP schedules for approved OSRs, control system sample documents, monitoring tool and Tariff structure. These will be used during training to exemplify especially the key output, the LRMP and R-MAP. 12. Trainers Manual and Guide Following the development of the LRMI manual and guide, it is planned that there will be rollout training for politicians and technical staff at the municipalities and districts. A Trainers manual Guide and Handbook has therefore been developed to support this process. Page 25 of 46 PUNTLAND STATE OF SOMALIA LRMI Frameworks Final Report

This manual has been specifically developed for the use of trainers who will be providing capacity building support under the JPLG/UNCDF in the municipalities and districts under the LRMI. The manual provides a guide for the trainer and participants in respect to the expected activities during training. A separate LRMI Participants manual and Guide has been made available for reference of more detailed discussions on issues in the curriculum. Trainers will be expected to make reference to the participants manual, which also may be used to extract notes as may be required. As a further guide in presentation, a set of Slides has been prepared to be modified to suit the learning environment. To optimally deliver the course content trainers will develop case studies; obtain real situation examples so that the training is as practical as is possible. The course is participatory and as such, trainers will be required to allocate ample time for discussions and exercises. This Trainers Manual and Guide contain group and brainstorming exercises, and illustrations. It is intended that the Trainers will use these materials in a manner that optimally delivers the course objectives. This trainers manual is organized in session s format and guides are designed in a manner that promotes effective participation through discussions and the sharing of experiences by the participants. For each session, the activities to be performed are given including the training methods and discussion tasks. All the materials for a session are well explained in the Participants manual and guide for revenue mobilization under a separate cover. The expected outcome from use of this manual is expected to be; (1) Harmonising methods and approaches to LRMI training in all respective LGs (2) Creating a cadre that will trainers for other Lg staff (3) Illustration of key concepts in training of adult learners and training methods (4) Practical delivery and participatory training. The Manual indicates the appropriate training methodology to be used in this knowledge transfer and timing. The course is participatory and as such trainers will be required to allocate ample Page 26 of 46 PUNTLAND STATE OF SOMALIA LRMI Frameworks Final Report

time for discussions, exercises and role plays. The Manual has the following key discussion issues; (1) Objectives and goals of LRMI (2) Training Approach (3) raining Delivery Methodology (4) Organizing a Training Activity (5) Training Requirements (6) Managing a Training Activity (7) Session Design and Planning (8) Training Assessment and Evaluation Activity (9) Local Revenues Concept and Legal Framework (10) Revenue Administration process (11) Roles of stakeholders in revenue mobilization (12) Registrations, assessments and collection of revenue (13) Mobilizing funds from specific revenue categories- Property, Livestock, Business (14) Revenue Performance analysis (15) Monitoring and performance measurement and reporting (16) Development of the LRMP and R-MAP (17) Revenue and expenditure projection 2015-2019 (18) Next steps 13. Workshops Workshops which involved technical staff and politicians from LGs and the centre were held during May and June 2015 in Addis Ababa and Hergeisa respectively. The key objectives of these workshops were; (1) To validate and discuss the mission findings (2) Analyse the challenges and develop possible solutions together (3) Discuss contents and concepts in the LRMI manual and guide (4) Conduct a ToT for staff who will be involved in the roll out training before the close of 2015. Page 27 of 46 PUNTLAND STATE OF SOMALIA LRMI Frameworks Final Report

(5) Have a participatory approach to development of the LRMP and R-MAP (6) Develop a consensus on the nest step actions. The key workshop outputs was support for the development of LRMP and R-MAP including skills transfer for personnel who will participate in the roll out training, and a consensus on next step actions. 14. The LRMP Concept The LRMP and R-MAP attempt during workshops was an initial illustration of how it may be developed and in no way was intended to result into a comprehensive plan for implementation. The workshops gave an opportunity for politicians to give guidance of possible direction and for then technical officers to take it up from there. In order to ensure a higher prospect of success of the revenue mobilization initiative, there is a need for a structured approach and sequencing of activities that will lead to overall increase in revenue volumes and sustainability of service delivery. A Plan helps to determine; what to be done, how, why, when, where at what cost and by whom. The LRMP will therefore identify and align the activities that will drive the initiative to another level in all respects. Sustainable Local Revenue Mobilization Initiatives [LRMIs] aimed at a reduction in service delivery gaps must be initiated and led by LGs themselves. To ensure successful LRMIs, the Plan will reflect strategies that will apply concurrently with processes that can substantially expand the tax base, improve collection efficiency, stakeholder participation, transparency, accountability, and direct linkage of revenues to service provision. The R-MAP will then be derived from the LRMP by prioritizing the activities basing on perceived benefits and costs. The overall R-MAP strategy will start with the quick-wins in the short-term and develop into more complex initiatives that may require changes in the legal and institutional framework. Page 28 of 46 PUNTLAND STATE OF SOMALIA LRMI Frameworks Final Report

15. Development approach for LRMP The development process builds on the earlier discussions and analysis of revenue administration challenges and solutions. The Plan presents a strategy of how the challenges will be handled, when, the timing, cost and responsible persons. Revenue mobilization initiative framework is considered through three schematic approaches; (1) Overall reforms in revenue administration, [revenue policy, assessment, collection, monitoring, reporting and accountability, enforcement] in the short term, (2) Identification of new revenue sources, [within the existing legal framework, new legal framework] in the medium term and (3) Activities and processes that will encourage expenditure rationalization, [waste reduction, accountability, procurement processes] Analysis from the mission findings and discussion in the workshops have identified that insufficient revenue generation is most commonly the result of a combination of factors and challenges relating to; (1) Collection efficiency [cost of collection per shilling] (2) Collection effectiveness, [how much of billed is collected], (3) Tax base [what to be taxed], (4) Tax coverage [who is paying and how much], (5) Tax assessment [basis of tax determination], (6) Capacity gaps [Human, space, finance] These key parameters will be the basis for formulation of the LRMP. LGs will therefore develop LRMP/R-MAP by identifying these challenges with each revenue source and solutions. Based on the solutions, cost, timing and responsible persons will be aligned with each solution activity. The sample formats for the LRMP have been provided in the LRMI frameworks manual and guide. The LRMP will initially focus on at least four revenue categories and on some specified sources as a means of showing early results in the short and medium term. The longer term perspective will build on the Quick Wins sources identified in this beginning phase. Page 29 of 46 PUNTLAND STATE OF SOMALIA LRMI Frameworks Final Report