KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY DEPARTMENT OF PLANNING.
FISCAL DECENTRALISATION IN GHANA: CHALLENGES AND WAY FORWARD
A Term Paper Presented as Part of the Assessment for Development Finance-Pl445
BY
ABDULAI ABDUL-RAHIM
DECEMBER 2013
1|Page
Table of Content
Contents
Page
1.1 Introduction ..................................................................................................................... 1 1.2 Fiscal Decentralization .................................................................................................... 2 1.3 Reviewing Fiscal and Financial Decentralisation in Ghana .............................................. 3 1.3.1 Implementing fiscal decentralization in Ghana ............................................................. 5 1.3.2 Challenges Facing Ghana’s Fiscal Decentralisation ...................................................... 6 1.4 How to Make Ghana’s Fiscal Decentralisation Effective ................................................. 8 1.5 Conclusion .................................................................................................................... 10 List of References ............................................................................................................... 11
2|Page
1.1 Introduction The reform of economic systems in developing countries during the 1980s concentrated largely on increasing the role of the market and improving the environment in which it operates. There was a preoccupation with the private sector, such that the potential role of the public sector in promoting development received little attention from governments for many years. However, there have been attempts to both redefine the role of the public sector in developing countries and improve its performance in all aspects in recent times. One important manifestation of these reforms is the decentralization of government functions in many aspects (Smoke 2001). In Ghana, Local governments were introduced as a result of colonization and development assistance requirements after colonial times. The earliest attempts at local administration during the colonial era were with the native authorities, which centred on a chief or some unit of local royalty, which was not well defined. The native authorities were not democratically elected but handpicked to represent the interests of the British Colonial Government as well as to administer law and order within a specific jurisdiction. Subsequent steps towards decentralization were purposely for administrative and control purposes. These, among others include the Municipal Ordinance of 1859, which led to the creation of municipalities in the coastal towns of the then Gold Coast. After independence, various attempts have been made to establish decentralization in Ghana. The Local Government Act, Act 54 of 1961 was enacted and this was geared towards decentralisation. There are five main implementation aspects in Ghana’s decentralization policy as stipulated by the ACT 462 which provides the foundation to Ghana’s modern day decentralisation.
These
are
political,
administrative,
planning
and
programme
implementation, management of public/private partnerships and fiscal decentralization. Most of these policy aspects have experienced tremendous strides over the years. Fiscal decentralisation has been one of the key components of Ghana’s decentralisation program. Fiscal decentralization has gained support by most of the world’s leading development organizations including the World Bank, United States Agency for International Development and, Asian Development Bank among others in the last two to three decades and it is for this reason that Ghana has also made strides towards fiscal decentralisation. 1|Page
Ghana fiscal decentralisation is relatively new and still under-going several reforms to make it more efficient and so it is therefore of much importance that some form of thought is given to the operations of this system to make it more beneficial. This paper therefore tries to examine Ghana’s fiscal decentralisation system but before that, the paper will explain what fiscal decentralisation is. The paper has also discusses the key components of Ghana’s fiscal decentralisation as well as some challenges facing it and ends with some measures of making it more effective.
1.2 Fiscal Decentralization Financial responsibility is a core component of any decentralization program. For decentralized units to carry out their responsibility effectively, they need to financially sound by having adequate level of revenues either raised locally and/or transferred from the central government or from other sources. They should also have the authority to make decisions about expenditures. This practise of distribution of public finance and responsibilities to the various levels government is usually referred to as fiscal decentralization. Many writers have linked the theoretical case for fiscal decentralization to the works of 17th and 18th Century philosophers, including de Tocqueville, Mill, Montesquieu, Rousseau, and Madison. Central governments were distrusted and small, democratic governments were seen as the principal hope to preserve the liberties of free men (Gill cited in Kazentet, 2011:7). This informed the direction of some responsibilities to these smaller units. This has informed democratic processes from then to this modern times where advocates for democracy and particularly, decentralisation sees fiscal management by sub-units to be very much key to the success of any nation. Fiscal decentralization has gained support by the world’s leading development agencies including the World Bank, USAID, the Asian Development Bank among others, making it “part of a world-wide reform agenda.” It has therefore played a major role in the formulation of economic, development and governance strategies in developing and transitional economies (Kazentet, 2011:7-34). The support by international organisation has made fiscal decentralisation almost inevitable to many nations. The emphasis of fiscal decentralization is to strengthen sub national finances and thus their capacity to provide public goods and services effectively. The idea is to give local
2|Page
governments some revenue authority and expenditure responsibility, and allow them to decide on the level and structure of their expenditure budgets. In this way the local people will be able to articulate their needs and preferences, and participate in governing their affairs. Fiscal decentralization as a means of achieving local development is based on two main arguments namely economic efficiency and local revenue mobilization (Bahl and Linn, 1992). The efficiency argument is that fiscal decentralization moves government nearer to the people and makes local governments more responsible for decisions about the level and mix of taxes and expenditure, thus increasing welfare. The revenue mobilization argument for fiscal decentralization centre’s on the fact that a decentralized tax structure might actually lead to an increase in the overall rate of revenue mobilization. Typically central governments collect taxes with a high threshold, which leaves many individuals and small firms outside the tax net. What this means is that a significant proportion of taxable capacity is left out of the tax base because of central governments lack the familiarity with the local tax base, which makes it difficult to identify small taxpayers and maintain tax toll. (Kazentet, 2011:19). Local governments do have familiarity with the local tax base because of a variety of licensing and regulatory activities in property and land based transactions. Also, the potential revenue yield from these local taxable activities may be a sizeable part of the local government budget as evident in Ghana.
1.3 Reviewing Fiscal and Financial Decentralisation in Ghana The financing of local government represents one of the core challenges for decentralization in Ghana. At the moment, decentralized functions and responsibilities are not yet fully met by accompanying transfers of financial resources, leading to a situation where implementation of District Development Plans is sometimes partial and unsystematic in many areas. According to Kazentet, (2011:23), decentralization and for that matter fiscal decentralization in Ghana has a strong legal environment that seek to promote and ensure its succession over the years. In the Article 35 (6d) of the 1992 constitution, it states that the state shall make democracy a reality by decentralizing the administrative and functional machinery of government to regions and districts and by affording all possible opportunities to the people to participate in decision-making at every level in national life and in government. The
3|Page
objectives and composition of decentralized subnational governments have since been laid in out in the chapter 20 of the 1992 constitution. In Article 240 (1 and 2e), it states that local government and administration be decentralized as far as practicable and that the functions, powers, responsibilities and resources be transferred from the central government to the local government. The independent role of the local government with discretionary powers at the grass root level is also made known in article 240(b). The article recommends measures to be taken to boost the capacity of local government authorities to plan, initiate, coordinate, manage and execute policies with regards to matters affecting the local people. With respect to the principle of participation and accountability, article 240 (2e) clearly states that, to ensure accountability of local government authorities, people in particular local government areas shall, as far as practicable be afforded the opportunity to participate effectively in their governance.
Other legal
instruments that seek to strengthen decentralization and for that matter fiscal decentralization in Ghana include: (1) Local Government Act, 1993 (Act 462), (2) Local Government Service Act, 2003 (Act 656), (3) National Development Planning (Systems Act) 1994 (Act 480), (4) District Assemblies Common Fund Act, 2003 (Act 455), (5) Public Procurement Act, 2003 (Act 663), (6) Audit Service Act, 2000 (Act 584), (7) Internal Audit Agency Act, 2003 (Act 658), (8) Financial Administration Act, 2003 (Act 654), (9) Financial Administration Regulations, 2004 (LI 1802). Other international legal binding of Ghana’s commitment to decentralization that also promotes fiscal decentralization among others according to Ghana (2010) includes: (1) Victoria Falls Declaration (1999) on an African Vision on Decentralization (2) The Kigali Declaration (2005) on Leadership Capacity Building for Decentralized Governance and Poverty Reduction in Sub-Sahara Africa (3) Commitment under the New Partnership for Africa’s Development (NEPAD) (4)Commitments under the Commonwealth declarations/affirmations which includes;
4|Page
Local
Governance
Forum
The Singapore Declaration, The Harare Declaration, Trinidad and Tobago Affirmation The Millbrook Action Program, The Aberdeen Principles and, The Latimer House Principles,
1.3.1 Implementing Fiscal Decentralization in Ghana in Principle. Ghana’s fiscal decentralization, has been so designed such that, its implementation will be guided by the following factors;
The” Subsidiarity” principle should be the basis for Expenditure assignments to MMDAs which has sufficient human resources, technical and financial capacity to perform the function. This is expected to be well defined for each tier of governance to pursue efficiency and accountability.
Clearly defined revenue assignments aligned with the functions to enable MMDAs adjust revenues to meet local needs was considered critical.
The IGFs should be significant, buoyant and reliable, providing ownership, sustainability and installing proper links between costs and benefits of service provision.
Revenue assignments should be clearly allocated to each level of government to avoid ambiguities and overlaps, dependent on expenditure assignments and commensurate with the expenditure needs of the local governments.
The legal framework for the expenditure and revenue assignment should be clearly stipulated to avoid doubts and conflict.
Fiscal transfer systems should harmonized, made simple, objective, fair transparent, timely, poverty eradication sensitive and with an element of performance base allocation of funds to promote MMDA efficiency and good governance.
The implementation of the DDF and FOAT with the attendant triggers and indicators should be executed to ensure that the system promotes downward accountability, transparency and participation in the execution of the core business of the MMDAs.
Effective fiscal Decentralization require that the FOAT and DDFF should not be limited to the MMDAs alone, but the Centre and the Regions `must also be
5|Page
assessed along similar lines to generally promote total efficiency and effectiveness in public sector administration.
The need for harmonization and coordination of all reform initiatives and interventions in the field of fiscal decentralization has become very relevant.
The funding system for local governments should combine local government internally generated funds with transfers from the central government and, to the extent possible, eliminate horizontal and vertical funding gaps.
Intergovernmental fiscal transfers should be based on transparent, objective and fair allocation formulas reflecting the needs and functions of the various units of government and avoiding local inequities.
The intergovernmental fiscal system should allow for improvements based on monitoring and evaluation systems with appropriate performance indicators.
Bottom-up and participatory planning and budgeting procedures should be pursued in a resource constrained manner with realistic planning and budgeting figures and timely announcements of amounts from the central government.
The system should recognize the various types and sizes of governments and consider their capacity and strengths.
Strong systems for intergovernmental coordination and collaboration on local government financial issues should be put in place.
1.3.2 Challenges Facing Ghana’s Fiscal Decentralisation The Cambridge Advance Learners Dictionary (2003) also defines it as “a situation, person or thing that needs attention and needs to be dealt with or solved” From the definition, it can be seen that, challenges and problems are similar since they both hinders an entity from achieving its desired results. They can therefore be seen as obstacles to success. In this context, the two will be combined to show the various obstacles hindering the successful implementation of Ghana’s fiscal decentralisation system. Some the challenges include the following. Although the Constitution prescribes fiscal decentralization in the form of devolution, there are significant conflicts between various legislations and this stated policy. An example of this is the mandating of RCCs and MMDAs departments within the Local Government Act, 2003 (Act 462) which undermines the local government’s authority to structure their own 6|Page
operational environment.
This makes the RCCs a deconcentrated unit of the central
government at the regional level. Also, the transfer of responsibilities and resources to local government requires effective and efficient administrative and management systems, which may take a while to develop at the local level. In Ghana, the developments of administration systems have been slow and unstable due to periodic reforms. Though the reforms are important to the decentralisation systems, they tend to make the administration unstable and this has not ordered well for fiscal decentralisation in the country. Also related to this is the inability of districts to put in place a proper revenue administration system. Gill (2003) and Kessey (1995) have identified the central aspects of revenue generation and administration to include tax payers identification, provision of tax services and education, assessment of tax liabilities, auditing and monitoring, collection and enforcement. These key features are missing in most local government units in Ghana. Local governments often lack good public expenditure management systems to assist them in their tax and budget choices and this can also be attributed to the weak administrative systems. The decentralization of resources and authority will not automatically result in more participatory and inclusive processes and top down approaches to development may continue regardless. Fiscal decentralisation requires much participation on the part of the people but this has been a challenge in Ghana. This can be seen in the inability of various district assemblies to implement the participatory budgeting system which is a key component of fiscal decentralisation. Smoke (2001), identifying critical concerns on fiscal decentralization argues that assigned revenues are almost never adequate to meet local expenditure requirements in most developing countries. In line with Smoke’s argument most district revenues are unable to cover the needed expenditure. Research has shown that about nine out of an average of sixty revenue instruments in metropolitan Ghana are productive. Research has also shown that the collection rate of metropolitan Ghana stands around 64% with an average revenue growth rate of about negative 0.03 per cent. These findings shows the local government units are still struggling with their revenue base towards meeting their expenditure needs. Apart from the above challenges, there are other challenges facing Ghana’s fiscal decentralisation system and these include: Poor human resource base to manage the 7|Page
processes, taxpayers have insufficient information or no political power to pressure local policymakers to make resource-efficient decisions and lack good public expenditure management systems to assist them in their tax and budget choices on the part of the decentralised units.
1.4 Ghana’s Fiscal Decentralisation. The Way Forward Having considered some of the challenges to fiscal decentralisation in Ghana, there is the need to consider some ways of improving the current fiscal decentralisation in Ghana. This part of the paper focuses on measures which can be put in place to improve Ghana’s current fiscal decentralisation system and practices. These measures are very important in limiting the effects of the challenges facing the system. According to Paul Smoke (Smoke 2001) key elements that should be included in a good fiscal decentralization program are: an adequate enabling environment; assignment of an appropriate set of functions to local governments; assignment of an appropriate set of local own-source
revenues
to
local governments;
the
establishment
of an adequate
intergovernmental fiscal transfer system; and the establishment of adequate access of local governments to development capital. Now let as try to examine of the elements propose my Smoke and how they can be applied to makes Ghana’s system effective and efficient. a) An adequate enabling environment An enabling environment for fiscal decentralization can begin with constitutional or legal mandates for some minimum level of autonomy, rights and responsibilities for local governments. This provides a foundation on which to build decentralization, but it does not by any means guarantee successful fiscal decentralization. There are many countries with constitutional clauses and laws on local government that have not managed to decentralize successfully. A good example is Indonesia, which became more fiscally centralized after a major decentralization law was passed in 1974 (Smoke and Lewis, 1996). On the other hand Ethiopia and Uganda, two often-cited cases of recent good performance (Bahl 1997 and World Bank 2000). First, in both countries, emerging political conditions have led to a strong national will to decentralize, second, both countries have recently developed unusually robust and clearly defined constitutional and legal provisions to support decentralization and the strengthening of decentralized levels of government, third they established institution to
8|Page
oversee and co-ordinate decentralization and local government reform and fourth both Ethiopia and Uganda recognized that effective local governments must have adequate resources to meet their responsibilities under decentralization (Kazentet, 2011:86). From the experiences of both Ethiopia and Uganda, Ghana can a lot. Though Ghana be said to have a robust and clearly defined constitutional and legal provisions to support decentralization and the strengthening of decentralized levels of government, the real implementation of the procedures and provisions are still a challenge. Measures should therefore be put in place to ensure strict adherence to the provisions in the local government act and the other supporting acts. b) Assignment of appropriate revenues to local governments Another measure has to do with assigning appropriate revenues to local governments. Paul Smoke (2001) identified four particularly problematic concerns on the revenue side. First, assigned revenues are almost never adequate to meet local expenditure requirements. This means that central government transfer programs are inevitably required. Second, local governments often use too many unproductive revenue sources that barely cover the costs of collecting them. Third, the same lack of attention and capacity to implementation also plagues the revenue side. Fourth, individual local revenue sources suffer from some serious design problems, such as static bases, overly complex structures and ineffective collection mechanisms. For the country to really make progress in its fiscal decentralisation, the above issues must be addressed. The central government must take a second look at the revenue sources assigned to the local units. Certain revenues like the driving and vehicle registrations taken by the local authorities can be added to their revenue base to help them in meeting their expenditure. The local governments units should also do proper revenue assessment to eliminate insignificant revenue sources. c) Establishment of an adequate intergovernmental fiscal transfer system The issue which will be considered is centred on arrangements for inter-governmental transfers. The current inter-governmental transfers can be said to be the cause of most of the problems at the district assemblies. The transfers are faced with numerous problems with key ones centred on its unreliability. The district assembly common fund which serves as a major
9|Page
source of revenue to the assemblies should be released on schedule to ensure the assemblies meet most of their expenditure requirements. Apart from the above, Osea (2005) has identified some key areas that need to be addressed to ensure an effective fiscal decentralisation and they include: The structural deficit caused by the mismatch between expenditure responsibility and Assigned revenues must be resolved. The imbalance in municipal revenues per capita (the “horizontal imbalance”) must be resolved. Inadequate local revenue-raising authority in general for Ghanaian MMDAs must be resolved. The special problems of resource-poor MMDAs that had very limited fiscal capacity must be resolved. The need for and more transparent system of intergovernmental transfers is very relevant. The need to reverse the declining level of capital investment in MMDAs can be considered.
1.5 Conclusion This paper has covered a considerable scope so far as fiscal decentralization is concerned as well as an overview of this system of government in Ghana. I it should therefore be noted that, making decentralization a generic phenomenon can be an enemy of Ghana’s system. Fiscal decentralization can be a very important asset for local development especially when the economy, politics, fiscal and institutional context and space within which it is to be employed is considered since these parameters vary from one space to another. Smoke (2001) therefore argues that “before thinking about fiscal decentralization, consideration must be given to the appropriate role of the public sector in a particular case”. Therefore, the Ghanaian setting should be well-considered in subsequent reforms of Ghana’s fiscal decentralisation system.
10 | P a g e
List of References Antwi-Boasiako, K. B. (2010). Public administration: Local government and decentralization in Ghana. Journal of African Studies and development, 2 (7): 166-175. Ankamah S. S. (2012). The Politics of Fiscal Decentralization in Ghana: An Overview of the Fundamentals, Public Administration Research; Vol. 1, (1): 33-41. Bahl, R.W. and LINN, J. (1992). Urban Public Finance in Developing Countries, Oxford University Press, New York-USA. Bennet, R. (997). Decentralization, Local Governments and Markets, World Bank, Washington DC-USA. Bird, R. & Salley, W. (2004). .Administrative Dimensions of Tax Reform, World Bank Washington DC-USA. Osae, E. O. (2005). “Capacity Building Requirements for an Effective and efficient municipal Financing and management in Ghana “Accra, Ghana Dick-Sagoe, C. (2012). Survey of literature of fiscal decentralization as a sustainable local development tool in Ghana. Journal of sustainable development in Africa, 14(3), 228251. Gill, J. B. S. (2000). Diagnostic Framework for Revenue Administration. World Bank Working Paper 472. Accessed on 12/11/2014 at www-wds.worldbank.org Inanga and Osei-Wusu, (2004). Financial Resource Base of Sub-national Governments and Fiscal Decentralization in Ghana, Institute of Local Government Studies, Accra-Ghana. Kazentet, M. H. (2011). An Assessment of Internally Generated Fund and Its Contribution for District Development Expenditure: A Case of Asutifi District, Ghana. Unpublished MSc Thesis submitted to Department of Planning, KNUST-Kumasi Kessey K.D. and Kroes G. (1992). Local Revenue Administration in Ghana; Practice and Prospect, SPRING Center, University of Dortmund, Germany Oates, W. (1972). Fiscal Federalism, Harcourt, Brace, Jovanovich. New York-USA.
11 | P a g e
Oates, W. E. (1993). Fiscal Decentralization and Economic Development, National Tax Journal, 46 (2), 237-243. Prud’homme, R. (1995). The Dangers of Decentralization, The World Bank Research Observer, 10(2), 201-220. Smoke, P. (2001). Fiscal Decentralisation in Developing Countries: A Review of Current Concepts and Practice. Democracy, Governance and Human Rights Program Paper, No. 2. Geneva: United Nations Research Institute for Social Development. Smoke, P. (2003). Decentralization in Africa: Goals, Dimensions, Myths and Challenges. Public Administration and Development, Vol. 23, 7-16. Smoke, P. (2001). Fiscal Decentralization in Developing Countries .A Review of Current Concepts and Practice, United Nations, NY-USA. World Bank (2000). World Development Report 1999/2000: Entering the 21st Century. World Bank, Washington DC-USA.
12 | P a g e
