A Note on Fiscal Federalism, Service Delivery and Capacity Building: The Case of Ethiopia

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A Note on Fiscal Federalism, Service Delivery and
Capacity Building The Case of Ethiopia

• Berhanu WB,07/05/09

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The theme of the Paper

• Describe the major feature of Fiscal Federalism
  in Ethiopia,
• The link between Decentralization and public
  service delivery,
• Capacity building approach for and under
  decentralization, and
• Concluding points as a lesson of experience.

3
Country Context

• Ethiopia is the second largest (populace) country
  in Africa with a population of more than 74
  Million,
• The Gross National Product of 144 percapita
  makes the country one of Africas poorest
  countries.
• an average GDP growth rate of around 11 in the
  past five years (2003/04- 2007/08),
• but growing macroeconomic imbalances that include
  high inflation (particularly in the last year)
  and low foreign exchange reserves,

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Country Context Contd

• never systematically colonized and had been
  exercising a very centralized qusi-feudal
  monarchy followed by a totalitarian
  Marxist-Leninist government system until 1993/94,
• After 1993/94 Federal system of Government with 9
  autonomous Regional States and 770 Rural
  Districts (Weredas) as well as city
  administrations,
• Disparity in socio-economic bases across Regions,
• With an overall umbrella of -ADLI strategy, two
  period of PRSs (SDPRP- 2002/03-2004/05 , PASDEP-
  2005/06-2009/10 )

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Fiscal Federalism

• Fiscal decentralization, with the objectives of
  economic efficiency, political efficiency, macro
  economic stability, and redistribution requires
  the following instruments
• Allocation of responsibilities to levels of
  government
• Allocation of taxes
• Transfer systems
• Central/Federal Government controls for
  overseeing sub-national governments
• Existence of local government election rules

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Fiscal Federalism Contd

• Ethiopias fiscal federalism has the following
  special features
• Fiscal federalism is accompanied with devolution
  of power /electoral rules/ to Regional States,
  districts/urban administrations
• general purpose untied grant is the dominant
  transfer system from Federal Government to
  Regional States and from Regional States to
  districts and urban centers
• credible and transparent formula has been
  developed for transfer of resources

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Fiscal Federalism Contd

• Transfers are made along with capacity building
  at sub national levels. This is done across a
  large number of sub-national governments
• Large share of expenditure especially for social
  infrastructure is devolved to local governments
  up to district level.
• budgeting and financial management system is
  deployed at a capacity required before
  entitlement and transfer of resources
• Resource allocation and utilization decisions are
  made by elected constituents and cabinet

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Fiscal Federalism Contd

• In Ethiopia, the legal and institutional
  framework for decentralization as well as the
  principles and the need for fiscal
  decentralization emanates from Federal and
  Regional States Constitutions.
• The objectives of the respective constitutions
  include the need to devolve fiscal
  decision-making power to lower tiers of
  government to enable Regional States and Woreda
  governments/administrations provide standard
  services and to narrow the vertical fiscal gap
  and ensure horizontal equalization.

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Fiscal Federalism Contd

• Accordingly the following Expenditure
  responsibilities are assigned to the Federal
  Government (Article 51)
• General functions include Defense, public
  security, federal police, foreign affairs,
  formulating overall economic and social policies,
  to control and manage the countrys fiscal,
  monetary and foreign investment policies,
  commerce
• The sector specific functions include
• building the capacities,
• Insuring food security,
• enacting laws for the utilization of natural
  resources,
• establishing and administering air, rail, water
  transport,
• regulate inter-regional trade,
• establishing national standard and basic criteria
  for public health, education, science and
  technology

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Fiscal Federalism Contd

• Regional States expenditure responsibilities
  (Article 52)
• General functions include socio-economic
  development policies implementation, elaboration
  of strategies and plans, and administration of
  police, maintain peace and order
• The sector specific functions include
• regional water resource development and
  protection policy,
• human capital development,
• inter-woreda and intra-regional roads,
• vocational and technical training, TTI, medium
  level colleges,
• hospitals and referral hospitals, and
• regional health service standard setting

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Fiscal Federalism Contd

• The different State constitutions delineate the
  following Expenditure responsibilities to the
  Weredas /Districts
• General functions such as
• implement various types of policies and laws
  issued by their respective Regional Governments,
• prepare and approve district development plans,
  programs and budgets,
• administer and manage of the civil servants in
  the districts,
• maintain peace and security using the police and
  militia in the districts

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Fiscal Federalism Contd

• Sector Specific functions include
• primary schools (1st and 2nd cycles),
• coordinating primary health care preventive and
  curative activities (i.e., the functions of
  health posts and health centres),
• managing and maintaining rural roads,
• coordinating agricultural development activities,
• making access to drinking water supply

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Fiscal Federalism Contd

• The Federal Government revenue assignment
  (Article 96)
• includes tax types that are highly progressive,
  have redistribute nature, and important for
  economic stabilization
• The types of tax include customs duties,
  personal income tax of Federal employees and
  international bodies, income on profit, sales and
  excise duties of Federal enterprises income
  taxes on air, rail and sea transport as well as
  on national lotteries and other games of chance

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Fiscal Federalism Contd

• The Sub-Nationals tax responsibilities includes
  (Article 97)
• taxes that are more local in nature and levied on
  relatively immobile assets,
• the type of taxes include personal income taxes
  on State and Wereda employees, agricultural
  income tax, rural land use fees, rental income
  tax, licenses and services fees, Taxes on income
  from mining operations, royalties and land
  rentals Taxes on profit, sales and excise of
  enterprises owned by the Regional States.

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Fiscal Federalism Contd

• Joint Federal-regional revenue arrangements are
  placed along with assignments of tax
  responsibilities (Article 98) for taxes such as
• Profit, excise and personal income taxes, on
  enterprises jointly established by the Federal
  Government and Regional States,
• Profits of companies and on dividends due to
  shareholders, and
• On incomes derived from large scale mining and
  all petroleum and gas operations as well as
  royalties on such operation

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Fiscal Federalism Contd

• The expenditure and revenue assignment and the
  nature of the tax structure in the country
  results in a mismatch in aggregate revenue
  capacity and expenditure (vertical fiscal
  imbalance)
• As a result the need for intergovernmental
  transfer
• Two types of Federal to State transfer
• General-purpose grant ,
• Specific - purpose grant

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Fiscal Federalism Contd

• General-purpose grant (GPG)
• A formulaic approach in allocating the transfer
  has been started in 1994/95,
• The House of Federation approves it,
• The determination of the transfer pool is based
  on the MEFF,
• Considering its skewed distribution and public
  finance management, external funded projects are
  considered in the grant allocation,
• own revenue is additional to grant provided for
  Federal- State but not for State-Wereda

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Fiscal Federalism Contd

• Specific-purpose grant (SPG)
• The objectives of providing SPG is to fulfil the
  goals of national priorities and also encourage
  performance improvement,
• SPG in the Ethiopian context is provided for
  expenditure assignments that are under the
  Federal Government or for implementation of
  Federal program at sub -national level
• PSCAP- as building and ensuring minimum capacity
  of sub-national level is federal mandate,
• Food Security- It is a national goal,
• PSNP- is a complementary to ensuring food
  security
• LIG Pilot Capital investments for local level,
• ULGDP Capital investment for Urban local
  governments

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Fiscal Federalism Contd

• Regional State - Wereda Grant System
• the objective and principle of Regional transfer
  is to empower weredas to decide on the use of
  financial resource,
• The type of transfer is a general-purpose,
• The formula is designed by Bureau of Finance and
  Economic Development and approved by the Regional
  cabinet and then by Regional Council.
• The fiscal federalism in Ethiopia shows notable
  results in
• The existence of predictable resource flow to
  sub-national governments
• Devolving of financial autonomy for sub-national
  governments ,
• Financing of pro-poor sectors as a result of
  local level decision making

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Fiscal Federalism Contd

• The Fiscal challenges can be summarized
• Lack of adequate expenditure for undertaking
  capital projects at local level,
• Federal Government Dominance of
  Inter-governmental Expenditure,
• Lack of reliable and up-to-date data for the
  Grant Formula,
• Weak Revenue Base of Regional States and local
  governments and lack of incentives to raise
  revenue for local governments,
• Inadequate borrowing authority by Regional
  States, and
• Inequality of Regional States and growing demand
  for financial resources by relatively less
  developed Regional States and nationalities

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Service Delivery Results and Challenges

• The decentralized model of service delivery
  contributed significantly to the improvements in
  outcomes
• Expansion in basic services has especially
  benefited the poor
• Ethiopia drives to reach the MDGs through
  expanded basic services
• However, progress is not always even, disparities
  persist across gender, income groups, and
  Regions, and differential performance exists in
  different sectors

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Service Delivery Results and Challenges
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Service Delivery Results and Challenges

• The following summarizes the Service delivery
  challenges
• access to services, equity in the provision of
  service
• quality provision of services
• citizen solidification in the delivery system
• participation of the grassroots, the poor, on
  prioritization and decision making
• ensuring accountability and responsiveness to
  service delivery
• Lack of manpower
• effectiveness and efficiency of operations of
  institutions

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Service Delivery Results and Challenges

• Service delivery challenges Contd
• sustainability and implementation capacities of
  institutions dealing with capacity building
• Absence of up-to-date systems, problems related
  to change of attitudes
• Disparity in the efficiency and implementation of
  capacity building within institutions and spatial
  units
• Disparity in pastoral/boarder areas

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Capacity Building for Decentralized Service
Delivery

• Noting the constraints of service delivery, the
  Ethiopian government introduced a national
  capacity building strategy (FY 2001)
• The nature of capacity building in Ethiopia
  includes
• Capacity building is linked to macro economic and
  sector development strategies.
• Capacity building is coordinated by an umbrella
  institution (Ministry of Capacity Building).
• Capacity building follows a comprehensive and an
  all round integrated approach.
• Based on the capacity building strategy, the
  government design 14 programs of which 6 of them
  latter on constitutes the Public Sector Capacity
  Building Program (PSCAP)

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Capacity Building Design
Public Sector Capacity Building Program
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Capacity Building for Decentralized Service
Delivery

• Civil Service Reform Sub-program
• to promote the development of an efficient,
  effective, transparent, accountable, ethical, and
  performance-oriented civil service
• Civil service proclamation revised
• Business Process Reengineering (BPR) advanced
• Civil Service Reform Offices established in all
  Ministries
• Ethics policy developed and anti-corruption
  commission established
• Service delivery policy and complaint handling
  manual issued

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Capacity Building for Decentralized Service
Delivery

• Expenditure Management and Control Sub-program
• to strengthen Ethiopias public sector fiduciary
  framework and to improve the efficiency and
  effectiveness of public expenditure management
• Comprehensive legal framework for public sector
  financial administration established
• New budget classification system adopted
  nationwide
• Accounts backlog cleared and double-entry
  accounting introduced
• BIS BDA accounting systems implemented in All
  regions except two
• Integrated Budget and Expenditure Management
  System (IBEX) introduced

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Capacity Building for Decentralized Service
Delivery

• District Level Decentralization Sub-program
• to deepen the devolution of power to the lower
  tiers of regional government and the grassroots
  level, thereby strengthening participatory
  decision-making, good governance, and
  decentralized service delivery
• Woreda planning and budgeting procedures and
  woreda fiscal transfer formula Study drafted.
• Community participation guidelines developed and
  implemented
• Woreda organizational structure and office
  requirements studied
• Woreda legal framework adopted
• Woreda SPM developed and implemented
• Good governance package developed and started
  implementing

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Capacity Building for Decentralized Service
Delivery

• Urban Management Capacity Building sub-program
• to enhance the capacity of municipalities in the
  delivery of services that meet basic human needs,
  reduce poverty and improve the environment and
  enable urban centers to play a more effective
  role in social and economic development
• Good governance advanced in cities and towns
  through restructuring necessary rules,
  regulations and manuals developed to manage
  cities
• Jobs created through micro and small enterprise
  (MSE), deepening capacity for participation
• Enabling environment created for medium and large
  enterprises

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Capacity Building for Decentralized Service
Delivery

• Tax System Reform Sub-program
• to encourage capital investment and development,
  to increase tax revenues, and to ensure equity
  and fairness in the tax system
• Tax proclamations and regulations adopted and
  implemented at Federal and Regional levels
• Revenue potential study being implemented at
  federal and regional levels
• Tax Identification Number (TIN) and Value Added
  Tax (VAT) introduced, with a steady rise in
  registrants
• SIGTAS (tax administration) and ASYCUDA
  (customs) information systems implemented
• Organization restructured to support strong
  enforcement, taxpayer education, and to leverage
  information and communication technologies
• Assessment, collection, audit and VAT operational
  manuals implemented. Tax officers trained

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Capacity Building for Decentralized Service
Delivery

• Justice System Reform Sub-program
• to promote the rule of law as well as the
  efficient and effective functions of the justice
  system
• Court Reform Sub-program
• to enhance access to justice by strengthening the
  capacity of judges and court clerks, reforming
  court administration, and implementing a modern
  case load management system
• Information and Communication Technology (ICT)
  sub-program
• to harness information and communication
  technologies for the development of human
  resources, democratization, service delivery, and
  good governance

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Capacity Building for Decentralized Service
Delivery

• In Summary, initial results of public sector
  reform on service delivery indicates that
• The link of capacity building to deepen
  decentralization to districts has tremendously
  helped for increased access of services in
  education, health, agricultural extension, water
  supply coverage,
• major success in the efficiency of government
  operations at 14 federal ministries, in most
  Regional States and districts, on licensing,
  court case handling, tax administration, revenue
  collection, expenditure management etc.
• The use of IT in service delivery (court,
  expenditure management, tax and school education)
  have increased,
• Systems have been placed for community
  involvement in planning and prioritization and
  other affairs,
• Increase in revenue performance.

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Capacity Building for Decentralized Service
Delivery

• Considering the approach and scope of capacity
  building activities in Ethiopia compared to other
  African countries four points can be sited
• An independent Ministry is responsible for
  coordinating a large number of reform programs at
  federal, Regional States and local levels.
• the design and executions of capacity building in
  Ethiopia follows multiple and large integrated
  sub-programs.
• Political economy factors drives the approach.
• it is implemented under federal setting and
  decentralized environment.
• Interest on the transfer of knowhow from
  countries doing well through twining arrangement
  and consultancy.
• Learning by doing on a wider scale approach.

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Concluding Points from Ethiopias Experience

• Efficient decentralized service delivery requires
  among other things strong ownership, political
  commitment and leadership,
• For successful local level service delivery
  linking it with capacity building is very
  important,
• Local level decision on service delivery requires
  a sustainable/predictable autonomy in financial
  resources, planning, and implementation
• Incentive mechanism has a very important role to
  play in improving service delivery.

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Questions

• .

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I Thank You