United Nations Capital Development Fund

Uganda Working Brief Series

Insights from the District Development Project: Table of Contents

Financial Transfers and Local Government Accountability

By the evaluation review team

Abstract

Through the planning, allocation, and investment management system (PAIMS) developed and refined during the implementation of the DDP, the provision of Local Development Funds (LDFs) to lower levels of government has contributed to improved service delivery and good governance in the five pilot districts. Although there is still room for improvement and learning, the lessons learnt from the testing and refining of the PAIMS have resulted in a financial transfer and local government accountability system that will serve as the basis for the devolution of capital infrastructure funds by the Government of Uganda. This brief is drawn from the Final Report of the November 1999 DDP Multi-stakeholder Review and Evaluation. It examines some of the successes and constraints found within the financial transfer part of the PAIMS.

I. DDP Planning, Allocation and Investment Management System

The overall aim of the District Development Project Pilot (DDP) is to support efforts by the people of Uganda to eradicate poverty in rural areas by improving the inclusiveness, efficiency, effectiveness and sustainability of the delivery of public goods and services. The primary Development Objective is to provide technical and financial resources to enable the definition, testing and application of a range of participatory planning, allocation, and investment management procedures which:

Empower local governments and communities to identify, deliver and sustain locally determined investment priorities for public goods and services; and
Provide practically tested lessons from experience and contribute to national policy and procedures concerned with decentralisation.

One of the seven immediate outputs of the Pilot project is the development and refinement of procedures for channelling development funds to Districts and Sub-counties. Through the Local Development Fund (LDF) and the Capacity Building Fund (CBF), the DDP is providing financial resources to enable the definition, testing and application of a range of participatory planning, allocation and investment management procedures. The flow of financial resources and the mechanisms through which it is accounted for is part of the process which the project is testing and endeavouring to define (DDP Pilot Project Document, October 21, 1997).

This Brief is a summary of the critical issues arising from an evaluation process of the financial transfer mechanisms by key DDP stakeholders in the five Pilot Districts1, central government and donor agencies. It is intended to provide timely information on financial transfer mechanisms to ongoing poverty reduction initiatives in Uganda such as the Local Government Development Programme (LGDP), the Poverty Action Fund (PAF), the Poverty Eradication Action Plan (PEAP) 2000, and the Programme for the Modernisation of Agriculture (PMA) 2000.

There are two main sections to this Brief: an introduction to the idea of the links between financial transfer mechanisms and issues of good governance; and some of the findings on the effectiveness of the PAIMS after two years of Project implementation. The section concerning the findings on the Effectiveness of PAIMS deals with:

Disbursement and Accountability
Accounting Delays including lessons concerning:
· Communication of Transfers/Releases
· Allocation Formula and Sharing of the LDFs
· Banking and Payments
· Delays in the Utilisation of Funds

II. Financial Transfer Mechanisms and Good Governance

Supporters of the DDP believe that the financial transfer system to and within local governments directly impacts on governance. Consequently, the design of the DDP financial transfer system was based on the assumption that restricted, highly conditional, unpredictable and irregular transfers from the centre to Local Governments is detrimental to good governance. How do these transfers impact on governance? For example, restricted, highly conditional, and unpredictable transfers can:

affect the local governments’ ability to respond in a timely manner to local service needs, creating suspicion and mistrust between local governments, between local and central governments, and between the government and its people (lack of transparency).
make it very difficult to track and monitor the use of funds (accountability).
disrupt project implementation by stalling construction and diminish the credibility of local governments to complete development projects.
cause project losses due to break of contract penalties and result in unproductive human resources.

Also restricted, highly conditional funds result in much more administrative work for local government department heads and more sophisticated financial monitoring systems in order to follow and account for the many conditions and restrictions. As a result, the technical heads such as the District Department of Health Services oversee well over 20 conditional grants. Leaving aside for the moment the administrative oversight function challenge and the question of whether these technical heads of departments have the administrative skills to monitor the numerous conditionalities and restrictions, conditional and restricted grants do not allow room for local decision making about development priorities. Decentralisation is meant to encourage community participation in the identification and prioritisation of local development needs, but this is greatly hampered by funds bound by fund conditions and restrictions imposed from the central government or donors.

In contrast the DDP proposes that discretionary funds, provided in adequate amounts in line with functional mandates, at predictable levels and regular intervals, will positively impact local governance, i.e., participation, transparency, and accountability.

Based on these design principles, the DDP transfer system was formulated with the following features:

Quarterly transfers of the funds in equal amounts to district and sub-county accounts;
Subsequent quarterly releases contingent on accountability for previous quarter;
Wide publicity of fund releases and indicative planning figures (for parish-level planning and budgeting);
Transparent formula for allocation to local governments;
Agreed sharing formula between district as 35% and sub-county 65% while the parishes receive 30% of the 65% allocated to the sub-county. The later is in line with the local revenue sharing allocation formula; and
Banking, payments, and procurement done according to the Financial and Accounting Regulations, 1998 Local Government Finance and Accounting Regulations (FAR), 1998.

After 14 months of testing, it is vital to know how the quarterly transfer and accountability system is working; whether there is transparency; what the views of local governments are about the allocation formula and sharing; and whether the FAR 1998 is being followed.

III. Findings on the Effectiveness of the PAIMS

The 1995 Constitution of Uganda, the Local Government Act, 1997 and the Local Government Financial and Accounting Regulations, 1998 establish a number of mechanisms at the district and sub-county levels to carry out and oversee the accounting and auditing of public funds at the local government level. The capacity in each of these areas can vary widely, but the findings within this brief focus on the five pilot districts of the DDP.

For Local Governments in Uganda, the accounting and auditing framework includes:

the elected officials (Councilors) of Local Government Councils at all
levels who plan and budget for their constituency and are responsible
to the residents for the use of public funds.
the Auditor-General appointed by the president of Uganda to “…audit
and report on the public accounts of Uganda and of all public offices
including the courts, the central and local government administrations,
universities and public institutions… [Constitution, 1995, Section 163
(1) (a)].”
the Inspector-General of Government (IGG) who promotes
adherence to rule of law; fosters the elimination of corruption, abuse
of authority and of public office; and promotes faire, efficient, and
good governance [Constitution, 1995, Section 225, (1) (a)(b)(c)].
the Chief Administrative Officer (CAO) who is the “…Accounting
Officer of the Administration… (LGFAR, 1998, Section 7)”
the Chief Finance Officer (CFO) who is “…responsible to the Chief
Executive for all financial transactions and accounts of the
Administration (LGFAR, 1998, Section 8)”
the Chief Internal Auditor (CIA) who “…shall report on the systems
and operations of the Administration whether efficient, effective,
economical, and free from fraud and other malpractices… (LGFAR,
1998, Section 172)”
the District Tender Board (Local Government Tender Board) which
“…shall award all contracts for Works, Services and Goods and shall
decide on disposal of Local Governments assets within its area of
jurisdiction.”
the Local Government Public Accounts Committee (PAC) which
“…shall examine the reports of the Auditor General, Chief Internal
Auditor and any reports of commissions of inquiry and may, in
relation thereto, require the attendance of any Councilor or Officer to
explain matters arising from the reports. (Local Government Act,
1997, Section 89 (7).”
the sub-county and parish chiefs (chief accounting officers at
these levels of government) and the sub-county accountant and
cashiers.

A. Disbursement System and Accountability

After the initial excitement and celebration that accompanied the first ever receipt of development funds by the local governments, the November 1998 Evaluation Report recorded that ‘Without exception, districts and Sub-counties believe the quarterly transfer system is inappropriate.’ Local governments noted that the arrangement stretches the implementation of projects to one year when in fact some investments could be completed in a shorter period and that many investments were at a stand still due to lack of funds. There was a unanimous plea for the disbursement system to be changed.

Arising from this recommendation a work plan-based disbursement system2 was adopted with effect from the first quarter 1999. Moreover, because of the obvious impact of the transfer system, it was decided during his Evaluation Review to undertake a more in-depth analysis of the merits and demerits of the quarterly release system vis-à-vis the work plan-based system.

Two key lessons have emerged:

1. The work plan-based disbursement system has been applauded as a significant improvement over the quarterly release system because it takes account of the pace and duration of implementation. For instance, under the new arrangement, a project with an implementation period of six months is expected to receive its entire LDF in two quarters instead of four quarters under the previous quarterly release procedure.

2. When the Review Team analysed the time it would take to effect the first and second quarter transfers and accountability, it was established that even under the most rapid administrative response, sub-counties would not receive their second quarter LDF until the middle of the third month of the quarter. This implies that funds for second quarter would not be used during the period for which it was meant. Predictably, when the Reviewers looked at the actual experience, it confirmed this analysis only that it took even a longer time. In the case of Arua for example, accountability from the Sub-counties was not received at the District until mid-November 1998 and LDF for second quarter only reached the sub-counties in mid-March (last month of the third quarter).

These two lessons show that under the existing arrangements for transfer and accountability (i.e., quarterly disbursement system) and the current level of local government capacity, regular and timely flow of funds is unattainable. This is an indication that the design of the transfer system is seriously flawed. It is vitally important to revisit the linkage of subsequent releases (whether quarter or work plan-based) to accountability for the quarter immediately before it.

B. Accountability Delays

As discussed above, the limited time allowed for accountability has been a major factor in hindering their compliance but with the recommendation granting local governments a longer period within which to prepare and submit their accountability, this should no longer be an issue.

The Review Team found three further hindrances that may undermine local government accounting performance.

1. There is unclear perception and ambiguity about what constitutes accountability and when it should be done. Sub-county Chiefs and Sub-accountants understood that accountability could only be made when funds have been fully disbursed from their accounts. In fact, there are three contradictory views found in the Pilot districts about the definition of ‘accountability.’

a) Accountability is a factor of time (as at a given date) and not usage. So, whether or not funds have been received or committed or disbursed, accounting for the financial activity up to a certain date should be submitted by the due date.

b) Accountability is only done after some funds are committed to project activities.

c) Accountability is only done after all the funds received have been spent and there is a zero balance on the account.

2. Some of the documentation requirement for accountability, especially the bank statement for bank reconciliation, is not easy to obtain. There can be a delay of one to two months before local governments receive their bank statements. This inevitably delays accountability, yet it is a problem that is outside the local governments’ realm.

3. The Team observed that sub-accountants (at the sub-county) are heavily overloaded with work. Not only are they involved in DDP related work, but also responsible for other financial and accounting duties including: collecting, banking, and disbursing of local revenue.

C. Communication of Transfers/Releases

Flow of information on investment activities, including transfer of funds, is a critical design feature of DDP. Again, the underlying assumption here was that it leads to better governance through increased transparency and public accountability. To attain this objective, various means were adopted to disseminate information on DDP activities including national and local stakeholders forums, publication of briefs and articles, printed materials including DDP ‘Guides,’ the Local Council communication system, radios, newspapers, posters, and local notice boards. From the beginning and progressively over the years, a number of these communication strategies have been added as performance measures in order to encourage good practices. After 14 months of implementation three key findings have come to light.

1) Communication Infrastructure
MoLG is informing Districts regularly and promptly about transfers although in the case of Kotido this has been hampered by poor communication between Kampala and Kotido. The district usually learns about disbursements when they physically check at the PMU offices or are informed during joint project meetings particularly the Project Technical Committee (PTC).

2) Local Development Fund Publicity
Information on transfers from districts to Sub-counties and Sub- counties to parishes is dispatched promptly through a number of channels including letters, posters, meetings and special radio programmes (e.g., Agafa e Mukono). However, most districts and Sub-counties do not communicate to lower level councils the amount of LDF that they retain and the investments earmarked to be financed with the funds. Apart from the executives, councillors and technical staff, the team did not find a significant level of awareness about the funds held by the districts and sub-counties among other key stakeholders. It is important that funds retained at these levels are effectively communicated to all stakeholders.

3) Community Information
There is limited knowledge at the community level about Indicative Planning Figures (IPFs) and the investments or projects that are selected for financing with the funds. The 1998 Review as well as the May/June 1999 assessment made a similar observation. Communities deserve not only to know what the bureaucrats and politicians are doing but it is vital that they are informed about resources coming to their areas so that they can participate in prioritising the investments and monitoring fund utilisation.

D. Allocation Formula and Sharing of LDF

According to the DDP-Pilot project document, allocation of LDF to districts and Sub-counties should be based on four parameters namely; population, land size, number of school age going children and infant mortality rate. At the parish level, however, the formula for distributing the 30% is based on population size. It was found that all levels of the local council system knew the formula. This demonstrates a successful effort in promoting transparency and is useful tool for empowering the local people.

Though the majority of stakeholders consulted were satisfied and accept these parameters in their entirety, there were a few dissenting voices. The latter suggested that the level of development in the area should be considered within the allocation formula – the equalisation debate. It should be noted that during the design of the project, this concern was foreseen and consequently local governments were given the discretion to arrange for intra-district/sub-county equalisation as part of their planning process.

The local governments are also aware of the percentages for sharing LDF between different levels of Government and most stakeholders are satisfied with the current structure. There is a debate over the amounts that the Parishes receive. Once distributed the amounts can be as low as Ush 200,000/- per parish. These amounts are considered to be too small to make a meaningful impact. Some argue that the small amounts should be consolidated at the higher levels for more effective investment planning and management. At the same time, there are those who contend that, though small, the IPFs contribute positively to good governance by providing people with the opportunity to participate in decision making, planning, co-financing and management of investments.

E. Banking and Payments

The Financial and Accounting Regulations, 1998 provides the rules and regulations for local government banking and payment and to a large extent local governments are complying with these regulations. Nevertheless examination of the various banking and payment transactions indicates two key areas of non-compliance:

1) Most districts are putting the LDF directly into the Project Account or the CAO’s Office Account without passing through the General Fund Account. However, it was concluded that since the DDP funds are budget support funds, they must be captured in the local government General Account and allocated once there is a final, approved budget from the Local Governments.

2) Some sub-counties are paying contractors with cash instead of by cheque, as required within the FAR, 1998 (intended to increase transparency and accountability channels). However, this can penalise small contractors who do not have bank accounts or who are in remote sub-counties where the cost of travelling is prohibitive and would take a significant percentage of their payment. This regulation may need to be revisited given the desire of the DDP and the local governments to support the use and capacity building of local contractors.

Another banking problem encountered in ensuring the timely transfer of funds is long time required to clear cheques/drafts issued by the Project Banker in Kampala. In one district, it took 1-2 months for a cheque to be
cleared. The major problem is the limited number of banks with upcountry branches. The Pilot Project has, on occasions, purchased drafts from Pilot Distict banks (where the districts have their accounts), but the cost involved
is substantial – 1% of the value of the draft. This is an expenditure that will be difficult to sustain.

F. Delays in Utilisation of Funds

During the review, most local governments had a significant balance of un-disbursed funds on their accounts. This seems to indicate that the rate of fund use is quite low. True, part of the explanation is that the 3rd and 4th quarter transfers for 1998/99 and for some districts the 1st quarter transfer for 1999/2000 were only received in September 1999, but there are other broad reasons to this, ( closure of bank, were DDP funds had been kept).

In nearly all districts and sub-counties there was an outcry that the District Tender Board meetings are infrequent. In most districts, the meetings take place once a month; however, in some districts the Tender Board meets once every two months. Lower levels of local governments consider this to be inadequate and see it as a major cause of delays in awarding contracts and subsequently utilisation of funds. Additionally even when contracts are awarded, the heavy workload of the engineering department and the reluctance of the LGs to outsource technical expertise slow down certification of works resulting in delayed payments and consequently the use of funds.

During the November 1998 DDP Review, recommendations were made that are relevant still. These recommendations are found below.

i. The Local Government Tender Boards (LGTBs) should publish a list of meetings, and closing dates for submission of requests for projects to be tendered.

ii. Sub-counties should ensure that they adhere to the timetable provided by the Tender Board by preparing their documentation before funds are received.

iii. To speed up certification of works, the district should:

Rationalise the use of existing engineers by reviewing all engineering positions in their respective districts (including sector departments) so that a greater complement of engineers are deployed to supervise the housing and construction works.

Districts and Sub-counties should outsource technical assistance using their 10% Investment Servicing Costs. Additionally, Sub- counties should use their ISC to finance the costs incurred by district engineers when supervising their projects.

Since there had been no significant steps taken to implement these recommendations in 1999, they should be added to the list of performance measures during upcoming assessments.

IV. Conclusion

The Planning, Allocation, and Investment Management System (PAIMS) was intended to contribute to procedural and policy development by defining, testing and applying a range of participatory planning, allocation and investment management procedures for local governments. The design of the DDP financial transfer system was based on the assumption that restricted, highly conditional, unpredictable and irregular transfers from the centre to local governments is detrimental to good governance because they affect the local governments’ ability to respond in a timely manner to local service needs. In contrast the DDP proposes that discretionary funds, provided in adequate amounts in line with functional mandates, at predictable levels and regular intervals, will positively impact local governance, i.e., participation, transparency, and accountability.

This Brief summarised some of the key issues in the financial transfer and accounting mechanisms of the PAIMS. It is intended to provoke thought and discussion about the issues emerging from a DDP stakeholder review of 14 months of implementation. In a time when the newspapers are full of stories about local government fraud and misappropriation of funds, one of the key findings of the November 1999 DDP Evaluation for both donors and central government is that across the districts, internal audit reports reveal that there are no cases of misuse or embezzlement of funds in the districts within the DDP. This gives further credence to the success of the PAIMS in promoting an environment of good governance in the districts. It offers evidence that should encourage donors and central government to invest in more discretionary funds at the lower levels of local government as a sustainable basis for supporting good governance in Uganda.

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