Design of overall local government finance systems
Why
In most countries, the local governments face great challenges in the economic area. The public expenditure policies are tight, and the demands from the citizens to the quantity and quality of the public
services are increasing. In order to comply with these challenges, it is necessary to develop the overall
framework of legislation, institutions, administrative procedures and administrative capacity regarding
the local government financing.
It is a precondition for decentralisation of tasks to the local government levels that the necessary funds
are made available either through central government funding or local revenue sources. Further, it is
of utmost importance for the local government’s self-sustainability that sufficient own financial income
sources are delegated to the local governments.
What
The design or re-design of local government systems will usually include all or a selection of the below
listed aspects:
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Legislation regarding local government finance
Local government budgeting and accounting systems
Local government budgetary processes
Public participation in budgeting and information sharing
Taxation, fees, charges and other local government income sources
Local government borrowing systems
Transfers of financial resources from central government to local governments
Equalisation of income and expenditure needs among local governments
Systems for collection, calculation and dissemination of local government statistics
Data and information systems between central and local governments
Accounting and audit procedures
How
The local government financial systems determine many other aspects of the local government sector.
Therefore, the basic legislative framework for local government finance must be developed.
However, the legislative process on local government finance should not be hastened too much, as
the long term sustainability of the system rests with the political commitment at all levels of the public
administration.
When the basic legislation is established, the specific components (budget procedures, transfers,
equalisation etc.) within the overall system must be shaped. This often involves finding a delicate balance between complete justice and administrative efficiency. Furthermore, a conflict in interests between central and local governments adds up to the complexity of the area.
Consequently, during a reform process, it is often advisable to establish transitory systems in order to
compensate "reform losers", or to carry out pilot projects within targeted areas in order to test various
options and generate concrete experience. For instance, local government financial statistics can be
useful for monitoring and evaluation, even though not all local governments can deliver complete data
sets.
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A brief illustration
Local government finance has been an element in many of the countries, where LGDK has provided consultancy services. In Sierra Leone LGDK assisted the Institutional Reform and Capacity Building Programme to improve the functioning of the devolution process of numerous tasks and functions from central ministries to local councils.
As a part of the assistance, LGDK reviewed the fiscal decentralisation process in close cooperation with
the Local Government Finance Department. This included in particular working on:
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Reviewing the development and appropriateness of the formulae for sector grants and the local
development grant focusing on predictability, timeliness, equity, fairness and transparency in the
allocation mechanism
Providing inputs to discussions and establishments of compensation schemes for tasks devolved
from central government to local councils
Reviewing the quality and availability of statistics on local councils e.g. for the formulae used to
distribution of grants
Assessing the quality and completeness of the overall national fiscal decentralisation strategy
Reviewing the local councils’ generation of revenues and assessing obstacles for improvements
The study ended up with listing specific recommendations for all the elements reviewed. The study
was later used by the programme and LGFD to improve the functioning of the devolution process in
Sierra Leone and modification of the fiscal decentralisation strategy.