FINANCING AND CAPITALISATION OF LOCAL AUTHORITIES FOR

DEVOLUTION PAPER 2.

1. INTRODUCTION AND CONTEXT

Generally, urban local authorities have been struggling with the issue of financing and
capitalization resulting in poor service delivery. The provision of adequate service delivery in
Zimbabwe has been an issue of great concern to the general public for quite some time now, and
any hope of seeing quality service delivery has been fading each day as the situation in local
authorities has been worsening all the time in a way which resembles that of a welfare state
according to Ghani and Lockhart (2010:27). In various public discussions concerning the poor
service delivery in local authorities, many reasons have been offered as the cause of the problems
around the lack of resources and little fiscal transfers and many others, which is going to be the
focus of this.

Service delivery can refer to a variety of main things in life; however, when it comes to
communities in an urban set up, service delivery can be defined as the provision of basic services
such as the provision of water, electricity, housing and maintenance of existing services (The
State of the Nation Address South Africa, 2005).

Financing or fiscal transfer refers to the equitable allocation of capital grants between provincial
and metropolitan councils and local authorities; and any other allocations to provinces and local
authorities, and any conditions on which those allocations may be made, Constitution of
Zimbabwe Amendment (No. 20) ACT 2013, Section 301.

Devolution refers to the transfer or delegation of governmental powers and responsibilities to

provincial and metropolitan councils and local authorities whenever it is appropriate,
Constitution of Zimbabwe Amendment (No. 20) ACT 2013, Section 264, (ss) 1.
Capitalization in this case refers to building of capacity of local authorities through fiscal
transfers the funds of which are used to buy new equipment for local authorities.

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The Urban Councils Act Chapter (29:15) defines local government councils as an area which
would have been declared by the President to be a local government area for the purpose of
administration of that particular community. A local government area is established in terms of
section 4 as per the Urban Councils Act Chapter 29:15 (1996). As such a local government
council is a legal persona which is capable of suing and being sued.

In Zimbabwe there are two types of local government councils, namely urban local authorities
and rural local authorities as per the Constitution of Zimbabwe Amendment (No. 20) Act 2013,
and they are considered to be the third- tier arm of the Central Government.

1.2PROBLEM STATEMENT/DEFINITION AND OBJECTIVES

In Zimbabwe, generally local authorities are not well resourced and a majority if not all of the
local authorities are threatened with viability and this issue leads us to look at the financing and
capitalization of local authorities in the context of devolution with special emphasis on:

a) Resource sharing-fiscal transfer (formula)

b) Tax sharing

c) Equalization grants (unconditional and conditional grants for a specific project of a national
(significance)

Given this position, the central question of this paper is, “How can the financing and
capitalization of local authorities for devolution be addressed?” Once that central question is
answered the objectives of devolution in Zimbabwe, in terms of the Constitution of Zimbabwe
Amendment (No. 20) ACT 2013, Section 264, can be met.

2. Operating Environment
2.1 Political Issues
The operating environment in Zimbabwe has been generally stable though at times it has been
punctuated with some instigated localized political skirmishes and these sporadic fights led to the
existence of political threat.
2.2 Economic Issues
On the economic front the country has been reeling under the Western imposed sanctions and
local authorities have not been spared.

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2.3 Environmental Issues
The climate change has also had its toll on the performance of the economy in some years as a
result of poor rains and drought. Challenges of climate change in Zimbabwe are not limited to
poor rains and drought only but to devastating cyclones such as the recent Cyclone Idai.

During the same period the local government sector experienced many challenges which would
alter or restrict the normal running of local authorities, and in a way that development affected
local authorities in their operations.
3. Survey of Ideas on Devolution
The African Charter for the Public Service (2001) has provisions which should guide member
countries and in that regard it has come up with some of the following values which state that:

 Citizens should be treated in the same way irrespective of their origins

 Public services should not act in a discriminatory manner
 Public services should be provided within the confines of the law
 There has to be continuity of service within the public service.

On the governance issue the African Charter for Public Services, (2001), indicates that the
services to the community should meet the standards of proximity and accessibility of services,
effectiveness and efficiency. Furthermore, public services must be organized in such a way that
there is decentralization and that the administration has to be identified with the people so that
they provide them with the basic services that are acceptable to the charter guidelines.

Zimbabwe at independence in 1980, inherited a local government system which had very little
interest in the general black poor community. In order to address the racial disparity
economically, the Government of Zimbabwe came up with a developmental program which was
called Growth with Equity through the Riddell Commission in 1981.

According to (The Journal of Modern African Studies volume 19, numbers 1-4) Zimbabwe at
independence in 1980 had a developmental strategy whereby it wanted to build a socialist,
democratic and an egalitarian society with the desire to:

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  Maintain and increase production.
 Rationalize incomes and services
 Rationalize some resources in other sectors

In order to achieve its objective of a developmental state, Zimbabwe came up with a major
economic policy paper: Growth with Equity. The aim of this economic policy was to record a
sustained high rate of economic growth which was estimated at about 8% per annum at that
time(The Journal of Modern African Studies volume 19, numbers 1-4). As a measure to achieve
its objective the government of Zimbabwe had planned to increase production in commerce,
manufacturing and mining. The other aspects of the developmental policy of Zimbabwe were to
shift productive investments into areas which had been neglected in the past and to encourage
commercial farmers to increase food production for domestic and export purposes (The Journal
of Modern African Studies volume 19, numbers 1-4).

Growth with Equity was later on followed by many other developmental programs such ESAP,
and this killed the developmental strategy of Zimbabwe. However, just like the growth with
equity all these preceding developmental reforms had little to do with devolution, and financing
of capital projects in local authorities was being carried out via the Public Sector Investment
Program (PSIP).

The drawback of the PSIP was that it was not a constitutional requirement to fund local
authorities. It was difficult for one to raise an issue when the government had failed to provide
funds under PSIP.

Now, with the new dispensation, the Second Republic has committed itself firstly, to fulfill the
guidelines of African Charter for Public Services, (2001) on governance and to go back to its
developmental strategy which it had at independence of Growth with Equity under Riddell
Commission of 1981. Secondly, it has also committed itself to implement the constitutional
provisions on devolution as per the Constitution of Zimbabwe Amendment (No. 20) Act 2013,
Section 264 provides that:

(1) Whenever appropriate, governmental powers and responsibilities must be devolved to

provincial and metropolitan councils and local authorities which are competent to carry out those
responsibilities efficiently and effectively.

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 2) The objectives of the devolution of governmental powers and responsibilities to provincial
and metropolitan councils and local authorities are spelt out as:

(a) to give powers of local governance to the people and enhance their participation in the
exercise of the powers of the State and in making decisions affecting them;

(b) to promote democratic, effective, transparent, accountable and coherent government in

Zimbabwe as a whole;

(c) to preserve and foster the peace, national unity and indivisibility of Zimbabwe;

(d) to recognize the right of communities to manage their own affairs and to further their
development;

(e) to ensure the equitable sharing of local and national resources; and

(f) to transfer responsibilities and resources from the national government in order to
establish a sound financial base for each provincial and metropolitan council and local
authority.

In order for financing and capitalization of local authorities to be successful on devolution, there
are two critical issues which should be addressed, and these are resource mobilisation and
political will. Resource mobilization for local authorities should not be the responsibilities of the
central government alone. Instead both the central government and local authorities should
commit themselves to the idea of financing and capitalization of local authorities by mobilizing
resources. Despite having said that it is important on the other hand match the devolved
functions and responsibilities with sufficient funding from fiscus.

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4. Resource mobilization theory of local government diagram

The Resource Mobilization Theory of Local Governance

MOBILISATION OF FINANCIAL RESOURCES

EFFECTIVE
SERVICE
DELIVERY

Mobilization of state resources Mobilization of people’s resources

This starts with the mobilization of financial resources by developing innovative market
based instruments such as the Temasek model and sovereignty wealth fund as well as
local economic development. This is accompanied by mobilization of people support for
local projects as well as the mobilization of state resources such as land and skills.
Once there are financial resources, state resources and people’s resources, effective
service delivery in the local government can be achieved under devolution.

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It is appreciated that the Government of Zimbabwe has demonstrated political willingness to
implement devolution and to demonstrate its desire to devolve; the government has rolled out a
number of workshops and conferences on devolution.

Section 301, of the Constitution of Zimbabwe Amendment (No. 20) Act 2013, provides for the
allocation of revenue between provincial and local tiers of government. The section stipulates
that not less than five (5%) of national revenue raised in any financial year must be allocated to
the provinces and local authorities as their share in that year.

5. Government Sources of Funds

When we are talking about financing and capitalization of local authorities on devolution it is
important for us to look at the government’s sources of funding so that we are aware of revenue
streams which can be considered for apportionment. The revenue which is collected by
government is pooled into the Consolidated Revenue Fund. The expenditure of government is
mainly funded by the following revenue streams;

 Taxes
 Fees
 Borrowings
 Donations
It is out of these revenue streams where the fiscal transfers to local authorities are expected to
come from
6. Resource Sharing/Fiscal Transfer

On fiscal transfer it is appreciated that there is at least 5% provision, whereupon the Constitution
of Zimbabwe Amendment (No. 20) Section 301 (Ss) 2, has come up with factors which should
be taken into account, among other factors to be:

(a) the national interest;

(b) any provision that must be made in respect of the national debt and other national
obligations;

(c) the needs and interests of the central government, determined by objective criteria;

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(d) the need to provide basic services, including educational and health facilities, water, roads,
social amenities and electricity to marginalized areas;

(e) the fiscal capacity and efficiency of provincial and metropolitan councils and local authorities

(f) developmental and other needs of provincial and metropolitan councils and local authorities;
and

(g) economic disparities within and between provinces.

7. of the 5% of the Inter-Governmental Transfer Funds

Disbursement of 5% inter-governmental transfer is appreciated; however, what is not clear is the

methodology which was used to arrive at the rate of at least 5% that is provided for in the
constitution. If the methodology is not available it would be suggested that the allocation of
funds should come as a percentage of decentralized functions and responsibilities to local
authorities vis-a-vis the functions which have remained with the central government.

It would be suggested as an example to compare the responsibilities, such as those of health,

education, water, social services, and roads against the same functions which the central
government is taking care of and then come up with percentages. The information about these
shared responsibilities can be provided by the ZIMSTAT. It is the expectation of this paper that
the inter-governmental transfers should be based on a formula which can be supported by some
figures.

The inter-governmental transfer should be adequate enough to cover the devolved functions and
responsibilities, probably the current 5% is far more or far less than the demands of the devolved
functions, hence the suggestion to compare the functions under local authorities and those under
the central government and then come up with percentages.

8. Education

On education, whilst government provides salaries for teachers and supervision, local authorities
play an equally big part as that of the central government in the provision of education service to
the community. Again, as was suggested above it would be expected that the central
government comes up with a fiscal transfer for local authorities which is based on the

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percentage of devolved function which local authorities are meeting as compared to that of
the central government on the same service.

9. Health

In regard to the health service, the government only provides medicines in clinics but local
authorities on the other hand play the role of hiring medical personnel and payment of salaries.
On this service local authorities perform a lot of unfunded mandates such as those on the old age
and infants, which if possible the central government will consider to fund. Still on the health
issues, local authorities have the obligation of providing portable water and construction and
maintenance of sewerage infrastructure.

10. Social Service

On social service, we are looking at issues like public safety, libraries, recreation facilities and
many others and local authorities are a sole player here. It is not a shared obligation with the
government.

11. Roads

On roads, most of the responsibilities are covered by local authorities. The government only
comes in on national roads; however there is an attempt to cushion local authorities on roads
maintenance and rehabilitation through the ZINARA funds. The difficulty of ZINARA funds is
that the figures are based on a formula which is not known by local authorities.

An alternative way to deal with the ZINARA funds is to localize the motor vehicle licensing at
the local authority level. Once vehicle licensing is localized the alleged distortion of funds
disbursement by ZINARA will have been dealt with since each local authority will be getting
what it deserves. If there are some local authorities which will be disadvantaged by this approach
that gap will be addressed through equalization grant

It is against this background, that it is suggested that the disbursement of the inter-governmental
funds be based on a percentage of decentralized responsibilities. Given this background it is
difficult to see how the unfunded mandates can be covered by the current inter- governmental
transfers.

12. Timing of Disbursements

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Disbursement of inter-governmental funds only takes place depending on the availability of
funds at Treasury. At times the funds come late for projects to be completed in the current year.
Currently, the allocated funds cannot be rolled over. In addition, to the untimely and delayed
disbursements the situation is compounded by the lengthy procurement processes. There is also
need to rollover the funds because some of the targeted projects cannot be completed within a
year.

13. Method of disbursements

The disbursement of the inter-governmental funds normally, comes through the Ministry of
Local Government, Public Works and National Housing which in most cases probably would
take a bit of a time before releasing the funds to local authorities. There has to be a defined route
which these funds should flow to local authorities.

14. Composition

It is recommended that the grant should have the component of conditional and unconditional
grants.

15. Tax Sharing

Local authorities are currently collecting only property tax and levies, whilst the central
government collects direct and indirect tax. Direct tax is tax based on income that is on wages
and salary earnings and it’s referred to as PAYE. On the other hand indirect tax is tax applied to
goods and services such as sales tax, customs duty and VAT.

These two types of taxes are collected by government and are not being shared with local
authorities despite the fact that some of the activities which generate those taxes are carried out
in some areas which are under the jurisdiction of local authorities. Given this position, this paper
will suggest that there should be some formula that can be used on tax sharing between the
central government and local authorities.

In the devolution of governmental powers and responsibilities, tax sharing was not considered to
be one of the objectives of the program despite the fact that some of the functions of government
have devolved and they require funding through tax sharing. Tax sharing would be suggested to

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be based on a percentage of the total tax collected by government in each Provincial Local
Authority.

16. Tax on tax

The Government of Zimbabwe introduced 2% on all money transfers. The only transactions
which are exempted from the 2%, are the transactions for the central government and its
departments. Local authorities are currently not being exempted from the 2% tax. While it is
being understood that government raises part of its revenue through a tax system to finance its
budget, the application of the 2% on local authorities brings in some complications. Local
authorities are a lower tier of the central government and by taxing it the government will be
taxing itself and this is tax on tax.

Taxing of local authorities has the effect of creating some ripple effects since local authorities
will naturally pass it on to residents thus overburdening ratepayers in the process. What is also
critical on this argument of taxing local authorities via the 2% is that local authorities do not
operate on a profit basis but they operate on a cost recovery basis. Even if the tax collected
through the instrument of the 2% tool is eventually given back to local authorities the argument
is that why taxing it for the sake of taxing when eventually it is being brought back? Given this
position it is suggested that a review of the application of 2% tax on local authorities be made.

17. Equalization Grants (unconditional and grant for a specific project of a national
(significance)

Earlier on, this paper looked at the inter-governmental funds transfer from Treasury to cover
functions which were devolved to local authorities without matching revenue. This appropriation
from Treasury does not cover developmental gaps between local authorities. Again the concept
of tax sharing if adopted by government would only benefit local authorities with resources
and industries and those local authorities which do not have industries will not benefit as
much. As such these gaps which have been identified above can only be addressed through the
application of equalization grants.

Equalization grants can come as conditional and or unconditional grants and its purpose is to
bridge the developmental gaps which exist between local authorities. The spirit is that the
living standards of people in different local authorities should be at the same level and it

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should address funding gaps which cannot be covered under fiscal transfers. The conditional
grant can be applied on any agreed method.

18. Recommendations

 On the appropriation of funds by the central government, the 5% disbursement to local

authorities should be based on the percentage of the devolved functions of each local
authority.
 There should be an independent steering committee on the disbursement of inter-
governmental funds and the composition should include local authorities.
 Disbursement of the inter-governmental funds should be done on time.
 Government should consider sharing of taxes with local authorities.
 The formula on the disbursement of ZINARA funds has to be agreed to by local
authorities.
 The tax on 2% ITT (Intermediate Transfer Tax) should not apply to Local authorities.
 Government should consider allocation of equalization grants to local authorities from
year 2020.
 Both the central government and local authorities should commit themselves to resource
mobilization on devolution.

Thank you.

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