Sector 6 – Health and
C. Ensuring a Just and Transparent Allocation of Transfers to Local Governments
49. The system of allocations and grants must be reviewed against best practices. Even optimized, own resources cannot cover all local government needs (Box 8), which is why it is
necessary to continue the transfer of allocations and grants. These transfers should have a number of essential qualities:
They should cover the needs of local governments, bearing in mind their specific economic, geographic and social characteristics.
They should encourage local governments to boost their own resources.
They should be predictable and anchored to national revenues so as not to destabilize the macroeconomic framework, particularly when the central government is encountering fiscal pressures.
They should not create significant asymmetries between poor local governments and those benefiting from windfall resources.
They should be assigned to certain categories of expenditures (i.e., investments) only in cases in which public policies or prudent management so require.
50. Most decentralized countries have introduced systems for the equalization of transfers adapted to specific characteristics and local policy needs. While some countries introduce
conditional transfers, targeting specific expenditures (Egypt, Ghana, Mauritania and Rwanda), others introduce a more general formula for the allocation of transfers. The current practice is to group these two types of transfers (Ghana, Kenya, Uganda and Tanzania) with a view to pursuing national
40 priorities, while also giving flexibility to local executives in the pursuit of local development
programs. Moreover, many countries adopt a budget allocation calculation base, i.e., the share of the central government budget intended for transfers. As an example, Morocco passes on 30 percent of total VAT proceeds, 15 percent of corporate income tax proceeds, and 1 percent of personal income tax proceeds in the form of transfers. Cameroon has established a surcharge (the “centime
additionnel”), which is obtained by increasing the amount raised through central taxes such as the corporate income tax and personal income tax by 10 percent; 70 percent of this surcharge goes to the communes and the remainder supplies an investment fund. In the case of Ghana, transfers cannot be less than 5 percent of tax revenues. This anchoring of the main allocation to a national tax
presents a real advantage of predictability and transparency of transfers at the central and local levels. Annex 3 presents the formulas used in countries comparable to Mali.
51. An adequate equalization formula combines transparency, simplicity and equity, but must avoid any disincentive effect. Transfers are also a tool for promoting good governance and protecting macroeconomic stability. The combination of these various factors guarantees better predictability of allocations, which benefits not only the central government but also the local governments as they prepare their budgets. Moreover, a less complex system avoids a lack of transparency of transfers and enables taxpayers to assess the effectiveness of local development policies. A basic characteristic of the resource distribution equations is that they must promote the optimization of local taxation. Although various formulas help to reduce excessive asymmetries between local governments, equalization equations do present a risk of being a disincentive to the optimization of local tax performance.
52. Mali is already using an equalization system for local investment. In 2007 Mali established a National Local Government Support Fund (FNACT), which is financed mainly by the technical and financial partners and in part by central government budget allocations and grants. The National Local Government Investment Agency (ANICT) manages this fund earmarked to investments essential for the improvement of public services. To allocate transfers, ANICT uses an interesting equalization formula (Box 9), which combines two series of criteria: (i) situation criteria (the needs of local governments based on their local context); and (ii) performance criteria (sound tax
administration by the local governments).
41 Box 9: ANICT Mechanism for the Allocation of Capital Grants
ANICT uses an equalization formula that distributes the rights to draw an initial allocation consisting of central government and donor contributions using a formula with two types of criteria:
1. Situation criteria: the number of inhabitants in the community, its distance from major commercial supply centers, the local poverty index;
2. Performance criteria: the capacity to collect tax resources based on the region’s collection rate for the local development tax.
Transfers from ANICT are threefold:
Subsidies for investment and technical support. These two subsidies represent 90 percent of the total transfers from ANICT. They mainly serve to finance investments undertaken under the contracting authority of the local governments (80 percent) and technical capacity building (10 percent).
Other subsidies support the operations of the local governments, particularly the financing of operating expenditures (support for local government operations) and the financing of activities conducted in the context of cooperation between local governments.
Finally, a specific allocation guarantees the loans of local governments, in compliance with the conditions set out in Article 252 of the Local Governments Code.
Source: National Local Government Investment Agency (ANICT).
53. The government could use a similar but improved formula to calculate the transfers for operating local government current expenditure. The ANICT equalization formula has the advantage of simplicity and transparency, but it also has limitations:
The calculation basis, i.e., the initial allocation,24 is a variable that is somewhat too random. The initial allocation varies depending on the sources of financing and the central
government budget equilibrium. This leaves discretion to the authorities responsible for deciding on the annual amount of allocations and makes it impossible for local governments to forecast the amount of allocations. To reduce this bias, the authorities could anchor the allocations to a more permanent base, such as to central government tax revenues or a particular tax category, in order to base the transfers on the national economy.
The equalization formula takes little account of geographic differences. The current formula uses the local population as the only criterion, which can disadvantage large, sparsely populated regions. It may be preferable to integrate size or population density in this formula, as other countries do (Kenya, Uganda and Rwanda).
The use of a single tax25 as a tool to measure tax collection capacity may be inadequate, given the extreme disparities in the revenues from this tax from one local government to another, particularly between urban areas and rural areas.
24 The allocation on the basis of which all the other various allocations will be calculated using the selected criteria.
25 The Local and Regional Development Tax (TDRL) in this case.
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