Download pdf - Improved budgeting and financial management as a tool for enhancing the performance of local government in developing countries

This article was downloaded by: [Universitaetsbibliothek Giessen]On: 18 October 2014, At: 04:30Publisher: RoutledgeInforma Ltd Registered in England and Wales Registered Number:1072954 Registered office: Mortimer House, 37-41 Mortimer Street,London W1T 3JH, UK

International Journal ofPublic AdministrationPublication details, including instructions forauthors and subscription information:http://www.tandfonline.com/loi/lpad20

Improved budgeting andfinancial managementas a tool for enhancingthe performance of localgovernment in developingcountriesRonald W. Johnson a & Syedur Rahman ba Social Sciences and InternationalDevelopment , Research Triangle Institute ,27709, North Carolina, P.O. Box 12194 ResearchTriangle Parkb Department of Public Administration GraduateSchool of Public Policy and Administration , ThePennsylvania State University , 16802, UniversityPark, Pa, 205 Burrowes BuildingPublished online: 26 Jun 2007.

To cite this article: Ronald W. Johnson & Syedur Rahman (1992) Improvedbudgeting and financial management as a tool for enhancing the performanceof local government in developing countries, International Journal of PublicAdministration, 15:5, 1241-1261, DOI: 10.1080/01900699208524757

To link to this article: http://dx.doi.org/10.1080/01900699208524757

PLEASE SCROLL DOWN FOR ARTICLE

Taylor & Francis makes every effort to ensure the accuracy of allthe information (the “Content”) contained in the publications on our

http://www.tandfonline.com/loi/lpad20

http://www.tandfonline.com/action/showCitFormats?doi=10.1080/01900699208524757

http://dx.doi.org/10.1080/01900699208524757

platform. However, Taylor & Francis, our agents, and our licensorsmake no representations or warranties whatsoever as to the accuracy,completeness, or suitability for any purpose of the Content. Any opinionsand views expressed in this publication are the opinions and views ofthe authors, and are not the views of or endorsed by Taylor & Francis.The accuracy of the Content should not be relied upon and should beindependently verified with primary sources of information. Taylor andFrancis shall not be liable for any losses, actions, claims, proceedings,demands, costs, expenses, damages, and other liabilities whatsoeveror howsoever caused arising directly or indirectly in connection with, inrelation to or arising out of the use of the Content.

This article may be used for research, teaching, and private studypurposes. Any substantial or systematic reproduction, redistribution,reselling, loan, sub-licensing, systematic supply, or distribution in anyform to anyone is expressly forbidden. Terms & Conditions of accessand use can be found at http://www.tandfonline.com/page/terms-and-conditions

Dow

nloa

ded

by [

Uni

vers

itaet

sbib

lioth

ek G

iess

en]

at 0

4:30

18

Oct

ober

201

4

http://www.tandfonline.com/page/terms-and-conditions

http://www.tandfonline.com/page/terms-and-conditions

INT'L. J. OF PUB. ADMIN., 15(5), 1241-1261 (1992)

IMPROVED BUDGETING AND FINANCIAL MANAGEMENT AS A TOOL FOR ENHANCING

THE PERFORMANCE OF LOCAL GOVERNMENT IN DEVELOPING COUNTRIES

Ronald W. Johnson Social Sciences and International Development

Research Triangle Institute P.O. Box 12194

Research Triangle Park, North Carolina 27709

and

Syedur Rahman Department of Public Administration

Graduate School of Public Policy and Administration The Pennsylvania State University

205 Bumowes Building University Park, Pa. 16802

ABSTRACT

Rapid economic and social changes in developing countries are impacting on their governments' ability to manage those changes, and local governments in these countries are becoming the core of decentralization experiments. This article examines the problems local governments face in meeting the challenges of rapid transformation and change. This paper suggests that budgeting be

Copyright O 1992 by Marcel Dekker, Inc.

Dow

nloa

ded

by [

Uni

vers

itaet

sbib

lioth

ek G

iess

en]

at 0

4:30

18

Oct

ober

201

4

1242 JOHNSON AND RAHMAN

used as a means for strengthening local governments' abilities to deal with such changes. Until now, budgeting has not been used as a key intervention tool for strengthening local governments. A working model to assess the state of financial and related management conditions of local governments is provided. This model can serve as a useful point of reference for change agents involved in the strengthening of local governments.

INTRODUCTION

Developing countries are experiencing many rapid changes that will alter permanently the nature of their economic and social development processes and the capacity of their governmental systems to manage those processes. Among the most important of these rapid changes are: (1) the acceleration of growth in urban populations, in cities of all sizes; and 2) the growing realization that central governmental systems alone cannot manage the processes of growth and development. The former is prompting a more intensive examination of the role of the city in the overall development process in many developing countries. That examination has led many governments whose national development strategies previously emphasized agricultural production and natural resource exploitation to place increasing emphasis on urban development strategies. The realization that central governmental systems alone cannot guide development is prompting a more intensive examination of the respective roles of central and local institutions in guiding and implementing urban development strategies.

In this article, we describe the budgeting process, broadly defined to include several tools of financial management, as a management tool useful for strengthening local institutions' ability to cope with rapid urban population growth and increased responsibilities. We begin with a discussion of the increasing importance of local government due to the rapid rate of urbanization and to the formulation by many central governments of decentralization policies. We follow that discussion of context

Dow

nloa

ded

by [

Uni

vers

itaet

sbib

lioth

ek G

iess

en]

at 0

4:30

18

Oct

ober

201

4

IMPROVED BUDGETING AND FINANCIAL MANAGMENT 1243

with an analysis of the key weaknesses in local authorities that impede their ability to cope with urban population growth and increased responsibilities. We conclude with a framework describing a financial management system for decentralized administration.

CONTEXT: RAPID URBAN POPULATION GROWTH AND THE DECENTRALIZATION OF AUTHORITY

Rapid urban population growth in most developing countries is occurring at the same time other forces are causing a reversal between central government and local government responsibilities in financing and providing urban services. First, large scale urban infrastructure investments made in the 1970s through the early 1980s are deteriorating, in part due to normal aging and in part to inadequate maintenance. Second, central government revenues, which for many of the most rapidly urbanizing countries are dependent on natural resource exploitation, are declining absolutely, or at best increasing at a decreasing rate due to changes in the world economy. Third, many countries are recognizing the inefficiencies of large central government enterprises and agencies deciding on and operating many urban services. These three forces combine to cause a reexamination of the role of central and local governments and are contributing to serious examination of the institutional locus for urban services financing and management.

Even in countries whose overall population growth has been brought within limits supportable by projected resources, urban population growth still outstrips resources necessary for urban dwelling, including safe and sanitary living and work conditions, shelter and potable water, and employment opportunities. According to United Nations data, urban population has been growing at a rate of more than 3 percent a year, nearly double that of total population growth. In contrast, urban population growth in industrialized countries is less than half that of developing countries. Between 1950 and 1970, the number of people in

Dow

nloa

ded

by [

Uni

vers

itaet

sbib

lioth

ek G

iess

en]

at 0

4:30

18

Oct

ober

201

4


developing countries living in urban areas more than doubled, from 275 million to 673 million, and by the end of this decade, that number should reach nearly 2 billion.") Figure 1 illustrates the marked contrast between more developed and less developed countries in the projected rate of urban population growth over the next thirty-five years.

Not only has population in urban places in developing countries grown rapidly, but the urbanization rate overall also has grown. Whereas urban population represented only about 17 percent of total population in developing countries in 1950, sometime between the years 2000 and 2020, more than 50 percent of the total population in these same countries will be living in urban areas.'2) This overall figure breaks down into nearly 40 percent for Africa, 39 percent in South Asia, over 50 percent in East Asia (excluding Japan), 65 percent in the Caribbean, 71 percent in Central America, and 84 percent in South America.

The sheer numbers of urban dwellers and the rapid pace of urbanization that soon will put the majority of residents in urban areas strain the capacity of urban services and make city governance and city management high priority development issues for most developing countries. Furthermore, urbanization has spread beyond the primary cities into both older and new secondary cities and into small towns and market centers surrounded by agricultural areas.*) Urban management in developing countries is a problem for large numbers of cities and towns, not just a few megacities in each country.

One consequence of the need to address rapidly multiplying urban management problems has been a trend toward decentralizing the responsibility for financing and managing urban services. Central governments are assigning responsibilities downward to local governments, although not always assigning additional revenue sources. For example, In Africa, Malawi is considering possible ways to strengthen local authorities and return some responsibilities previously fulfilled at the local level, as well as new service delivery resp~nsibiI.ities.(~)

Dow

nloa

ded

by [

Uni

vers

itaet

sbib

lioth

ek G

iess

en]

at 0

4:30

18

Oct

ober

201

4


FIGURE I World Urban Population

Less and More Developed Countries

Billions

Source: U.N. Prospects of World Urbanization 1988, United Nations, New York, 1989.

Central and South America have longest been highly urbanized, and not surprisingly have some of the earliest decentralization efforts of recent decades. Colombia embarked on an ambitious program of fiscal reform in the late 1970s, including the adoption of major changes in intergovernmental fiscal relations to strengthen the linkage between means of finance and responsibility for public service. A consequence of that reform was increased roles for local governments in planning and managing basic urban service^.'^ Although a decade has passed with perhaps more difficulties and fewer successes, several successive administrations have reaffirmed Colombia's commitment to greater decentralization, including in 1990 devolving greater authority to local governments for control of education, one of the most sacrosanct of central government responsibilities in most developing countries. Chile also is

Dow

nloa

ded

by [

Uni

vers

itaet

sbib

lioth

ek G

iess

en]

at 0

4:30

18

Oct

ober

201

4


experimenting with decentralizing not only traditional urban services such as street maintenance, solid waste collection and disposal, water and sanitation (all of which have been to a degree local responsibilities), but also traditionally central services such as health and education.

In Asia, even though rural populations still outnumber urban in many countries, rapid urbanization has been a factor in ambitious decentralization programs. Although still more than 60 percent of the population live in rural areas, Indonesia began in the mid- 1980s to respond to an urban population growth rate in excess of 5 percent compared to a total population growth rate of nearer 3 percent with a national urban development agenda. Among other things, the national Urban Policy Statement assigned increased responsibility to local governments for both financing and providing basic urban services.@)

The trend to decentralize urban services in many developing countries is not only a response to rapid urban population growth. Central governments themselves during the oil shocks of the 1970s and the collapse of many commodities markets in the 1980s experienced severe setbacks in national economic development plans. Central government revenues declined absolutely in a few, and relatively in almost all developing countries at some time during the 1980s. Lacking the resources themselves, many central governments have turned to local governments to shoulder an increased load.

In Africa, where decentralization lags behind both Asia and Latin America, the pressure to decentralize is in part due to the structural adjustment programs imposed by the International Monetary Fund. Structural reform typically includes requirements to decrease governmental employment, decrease the role of parastatals in the economy, increase the role of the private sector, and decrease the central regulation and control of market forces. The increased use of local governments is seen as one of the ways to allow market forces to operate more freely and to provide a form of competitive market for basic governmental service^.^

Dow

nloa

ded

by [

Uni

vers

itaet

sbib

lioth

ek G

iess

en]

at 0

4:30

18

Oct

ober

201

4


Many also see decentralization as a necessary step in ensuring that expensive infrastructure already built receives adequate maintenance. For example, roads often deteriorate so rapidly that they are no longer serviceable even during the period in which debt service remains. This inadequate maintenance is attributed to the lack of incentives that local governments have to maintain facilities in which they played no role in planning, designing and implementing. Decentralization of planning and operation to local governments is being tried in order to increase the efficiency with which infrastructure is planned, built and maintained. (*)

WEAKNESSES IN LOCAL BUDGETARY AND FINANCIAL MANAGEMENT PROCESSES

Two areas of concern about the capacity of developing country local governments to manage their growing responsibilities predominate: (1) the poor quality of financial management information and (2) weak linkages among the different components of local financial management systems.

Poor Quality of Financial Management Information The poor quality of financial management information

manifests itself in two important respects. First, information about costs and performance is insufficient to identify how much urban services cost and how well those services perform. Second, information about costs and performance does not adequately identify responsibility for managing those services efficiently and effectively.

Even in a highly centralized system, local institutions with some degree of autonomy from central institutions are responsible for common basic services such as the maintenance of town or city streets; urban footpaths; drainage; the provision of solid waste collection and disposal; and the construction and operation of markets, slaughterhouses and resthouses. Less centralized systems add to these the operation and maintenance of other infrastructure

Dow

nloa

ded

by [

Uni

vers

itaet

sbib

lioth

ek G

iess

en]

at 0

4:30

18

Oct

ober

201

4


services such as water and sewerage. In centralized systems, the local responsibility to operate and maintain infrastructure systems has not included the finance and construction of such systems. And the local costs even of operating and maintaining systems often are heavily financed by central government budget transfers to local governments.

It is common for local budgets to be made up of as little as 30 percent of their own source revenues with 70 percent coming from various forms of central government transfers or direct payments. For example, salaries of all local officials in Indonesia are financed by a central government salary subsidy g m t (Subsidi Daerah Otonomi), with central authorities determining pay levels and annual increases as well as number and types of local civil servants.

As systems become more decentralized, central governments increasingly require local governments to get involved in infrastructure finance and construction as well as to accept more responsibility to raise revenues from own sources to finance other services. But the budgeting and accounting systems in place were evolved to support the record keeping needs of these mixed responsibilities rather than identify the cost and management issues in providing the basic service. Thus, central support for salaries, for example, may appear as part of a consolidated salary line item in a total local budget, and not be disaggregated into the various service departments. Therefore, it is impossible to determine the total or unit costs of any particular service. The local government budget for operation and maintenance of a water system, originally financed and constructed by central government, typically will show only those operation and maintenance costs, with no debt service costs for the financing mechanism that built the system, because that is in a central government budget account, and no depreciation charges to incorporate capital costs. User charges set to recover costs of the water system, therefore, typically are expected to recover only the operation and maintenance costs. However, as central governments look more to local governments to assume responsibility for infrastructure

Dow

nloa

ded

by [

Uni

vers

itaet

sbib

lioth

ek G

iess

en]

at 0

4:30

18

Oct

ober

201

4


services, future capital expansion of those systems will become a local responsibility. But the budgetary and accounting practices that have been in place have supported a cost recovery system that will not finance capital expansion. Local governments increasingly face refusals to pay higher tariffs or indeed may not even be able to estimate accurately what the tariffs need to be to finance capital expansion.

Most cities in developing countries, whether a megacity like Bangkok or a secondary market town such as Salima, Malawi, operate one or more markets to assist rural agricultural producers and other entrepreneurs in marketing their products. Most of these cities charge vendors some type of stall or head tax to recover some or all of the costs of operation. However, the cities' budget and accounting systems do not account for the total costs of that market, including original capital costs, utilities consumed during market operation, and the services provided the market by various city departments. The result is that market fees may or may not be even close to operating costs, and only a special study can provide the information needed to determine accurately what the operating costs are. A set of budget accounts, such as a revolving fund, that reflect market operations, including interdepartmental transfers, would provide the type of information necessary to set fees at whatever level of cost recovery public policy has determined is appropriate.

The second record keeping problem is the inability to identify responsibility for managing costs and providing services. Line item or object of expenditure budgets reflecting the city organizational structure often do not reflect the operating structure for service provision. A city's public works department, for example, may be responsible for streets, drainage, public parks and recreation areas, and city buildings, but the department's budget is unlikely to be subdivided into separate accounts for those functions, or if it is, it is unlikely to include personnel costs in those subaccounts. Therefore, managers responsible for those services cannot be held accountable for the level of services they

Dow

nloa

ded

by [

Uni

vers

itaet

sbib

lioth

ek G

iess

en]

at 0

4:30

18

Oct

ober

201

4

1250 JOHNSON AND RAI-IMAN

provide at known costs, and indeed may not even know themselves what the costs of their operations are.

Weak Linkages Among Different Components of Financial Management System

There are six areas in which different components of financial management information are not at all, or are inadequately connected to each other: (1) available accounting information is inappropriate for financial management decision making; (2) revenues are weakly connected to purposes; (3) inadequate attention is given to performance as the basis for budget and revenue estimation; (4) long term capital planning and budgeting processes are lacking; (5)inadequate attention is provided to operating (recurrent) budget implications of capital investment decisions; and (6) inadequate attention is given to the impact of operations and maintenance on future capital investment requirements.

Local governments newly taking on responsibility for urban services provision are not accustomed to budget allocation decisions that determine how much of what different kinds of services will be provided. To the extent that local government have been previously involved in preparing budgets, the budgets have been prepared them for central government review and approval, rather than as a set of decisions about services to be provided.

In Egypt, for example, subnational administration prepares annual estimates of revenues that will be collected locally and estimates of expenditures (non-salary) that will be required (based upon centrally guided assumptions about cost andlor service increases). The difference between these two estimates is presented to the central government as the amount of central budget support required. Budget estimates are not based on accounting records of the actual costs of services provided in the previous year, which would not have included salary costs anyway, and are not based on service records of actual performance of those responsibilities. Lacking these basic linkages between

Dow

nloa

ded

by [

Uni

vers

itaet

sbib

lioth

ek G

iess

en]

at 0

4:30

18

Oct

ober

201

4


account information on costs and service information on performance, budget decisions rarely reflect even approximate estimates of the funds required to perform basic services. In primary schools, for example, it is common to run out of basic supplies before the mid-year point.

The second problem, weak connection between revenues and the purpose for which the revenues are collected, affects decisions about which services to undertake, how much of each service to undertake, and tariffs or user charges to be set for each service. A decision to collect user charges to recover part or full cost of a particular service influences demand for that service from potential users. The decision to finance a service from general local revenues has varying impact depending on the main sources of general local revenues. If the city's general fund budget is financed say 75 percent by central transfers, there is less incentive to be efficient with that service than if the general fund budget is financed 75 percent by local property taxes. Property taxpayers are more likely to pressure local government than a nebulous "national public" is to pressure the central government, and the demand for local services is likely to decrease when beneficiaries become aware of their direct payments required to finance services.

As local governments have had little responsibility for providing major services in the past, they are unlikely to have systems in place to evaluate the performance of public services, or even to consider linking performance to costs. Local budgets that are organized exclusively by department and line items or objects of expenditure typically do not contain any information about volume of service or service quality. Unfortunately, the first major emphasis in many decentralization efforts has focused exclusively on increasing local governments' ability to generate new revenues. This emphasis has had some success, as local governments given the authority to collect and retain part or all of property taxes generally increase property tax collections substantially. However, inattention to performance on the expenditure side soon begins to erode taxpayer willingness to pay

Dow

nloa

ded

by [

Uni

vers

itaet

sbib

lioth

ek G

iess

en]

at 0

4:30

18

Oct

ober

201

4


if service improvements, in quantity or quality, do not soon follow increased local tax collections. Performance measures to evaluate the quantity and quality of local services, even crudely, are an important missing link in most local government financial management systems.

The fourth problem, lack of long range capital facilities planning and budgeting processes, is charateristic of local governments that typically have not been responsible for infrastructure services. As they become more involved in capital facilities planning, the tendency is to plan and budget only for the immediate next year. A consequence of that is an overemphasis on projects that can be completed in one year. Another consequence is that no local economic development perspective is applied to capital facilities planning, and infrastructure investments accordingly may not be optimal from either an economic or a social point of view.

The fifth problem is the inadequate attention provided to the future operation and maintenance implications of present capital investments. Central governments in many developing countries have done a poor job of budgeting for and executing operation and maintenance programs on the infrastructure systems they have built. In many instances, that operation and maintenance has been a local responsibility. One consequence has been that central governments are saddled with debt repayments for infrastructure that no longer is even functional.(g) Local governments assigned the responsibility to maintain infrastructure in which they had no planning or decision role do not carry out that responsibility with enthusiasm. It is difficult to generate local revenues for facilities citizens did not request in the first place.(lO)

The reverse problem is as serious. Even when fully engaged in decisions about how much and what kinds of infrastructure to finance, local governments still fail to plan adequately for operation and maintenance. The need for capital facilities often overwhelms planned decision-making for long range capital investment. Since newly constructed facilities require less maintenance, it becomes easy to defer maintenance, and once

Dow

nloa

ded

by [

Uni

vers

itaet

sbib

lioth

ek G

iess

en]

at 0

4:30

18

Oct

ober

201

4


deferred, never performed. In many developing countries, operation and maintenance budgets wind up being spent mainly on reconstruction and rehabilitation of facilities that have become dysfunctional long before their expected lifespan would have predicted. Some estimates place the capital investment costs of facilities that must be built or rebuilt prematurely due to improper and inadequate maintenance at half the total capital investment expenditure.'") Another way of putting it is to say that half of the capital investment expenditures in many developing countries is spent on facilities that should not have needed replacement, denying the opportunity to put in place needed facilities that would expand economic development.

In the next section we present a framework for analyzing and defining the types of local budgetary reform necessary.

REFORMING LOCAL BUDGETARY AND FINANCIAL MANAGEMENT PRACTICES FOR

STRENGTHENING LOCAL GOVERNMENT

Each of the problem areas in the preceding section reveals that local governments in developing countries, if they are to assume the roles and responsibilities thrust on them by rapidly growing urban populations and decentralization programs, need to develop budgeting systems that will enable them to plan, finance and manage urban services. A commonly utilized strategy for strengthening local government in developing countries has been to incorporate local government as a legal entity with independent responsibilities and functions. This process often has not been successful as the central government undermines local government independence by maintaining control over personnel and resources, in effect making local government more ceremonial than hn~tional.('~.'~) An alternative strategy is to strengthen local government's ability to manage resource allocation and, by means of this process, increase its decision making capabilities. It is expected that as decision making capability is improved, local government will become more independent. In order to

Dow

nloa

ded

by [

Uni

vers

itaet

sbib

lioth

ek G

iess

en]

at 0

4:30

18

Oct

ober

201

4


establish a framework for analyzing and defining the types of local budgetary and related management reforms that will be necessary a number of broad assumptions need clarifying.

The central government's role in public sector planning and management should be decreased. Local government responsibilities in the operation and maintenance of services as well as capital facilities, including some development planning should be increased. While seeking to increase local revenue, local golvernments will still need significant financial resources from the central government. Real responsibility can be achieved when local governments have independent decision making authority and concurrent control and accountability for resource expenditure.

The financial management system for decentralized administration as shown in Table 1 provides a classification system which can be used by change agents to assess the relative position of local government in public sector management in developing countries. Such assessment will aid change agents to identify specific weaknesses in financial and related management technology and allow them to develop appropriate strategies for strengthening local governments. The framework identifies a set of primarily financial but also related management variables critical to evolving a strong local government system. The framework elaborates the working conditions of each of the variables at three different stages of development - rudimentary or fist stage, intermediate or second stage and advanced or third stage. An objective is to identify what a financial management and budgeting system is expected to accomplish at each stage. With those goals in mind, agents need to work backward and identifj the basic operational conditions within each management variable that should be met at the different stages. Using this approach, an additional objective is to provide a financial management organizational intervention strategy for strengthening and making independent, the decision making capabilities of local government.

Dow

nloa

ded

by [

Uni

vers

itaet

sbib

lioth

ek G

iess

en]

at 0

4:30

18

Oct

ober

201

4

T W 1 ?lnanclal hnagmrmnt armtern for Decmntrall~md A&inlatration

Organltatlonal Condltlonm Structural Condltlonm tlnanclal Condltionm Tlnanclal Management Tamka

Tlrat Local Government UnLt Developnent of Entrusted flnanclal Developmmnt of recordm State (LCU) lm llnk agency Ilnancm Comalttem rmaponaibilltlem tranmactlon of fundm

for cmntral government. rmcordm.

LGU peripheral to publlc mector operatlonm.

LOU no dmclmlon maklnq capabllltlmm.

LOU 808 flnanclally dependent on central admlnlmtratlon grmtm for operatlonm.

Staff Dmvelopnent hlrlnq and tralnlnq.

Profemmlonal mtaff deputized from hlqhmr unltm.

Remtrlcted allocatlvm declmlon maklng authority ovmr grant..

Bmverly llmltmd lndependent source of lncomm.

Tranmactlon of camh flou recordm

Accountlnq recordm of rmaource allocatlon.

Second LCU ham limlted control Regularltatlon of LLmlted allocatlve state

Fundm accountlng Over remourcem flnancm conmittee declmLon maklng authority coordinated managemnt

over mntrumted remponmlb- of cawh flou. LGU coordlnatad central Expanmlon of LCU 11th.. qovmrnment ~ctlvltlaw. mtaff Budaet mvwtem for

LCU 608 flnanclally dependant upon central admlnlmtratlvm qrantm.

Third LCU attalnw maxlmum State control over remource

trenmferw to decentrallrmd unit*.

LGU 308 lndependant of central admln- istratlon qrantm.

- - -

Coordlnatlon of entrusted all&atl&f&-- Reduction of fund.. Enlargement of decmntralltmd unltm. of deputized mtaff allocatlve declalon maklng

authorlty ovmr grant*. Budget mymtem for allocatlon of qrantm.

Increame In mourcem of independent rmvenum.

Inmtitutlonallratlon Xaxlmum 408 allocatlvm Advanced accountlng of flnancm comlttmm declmlon maklng uthorlty

over remource tranmfer to Profemmlonal mtaff decentralized unltm.

Reduction of 308 of qrantm.

Increame of lndependent mource of revenue equlvalent to 308 reduction of grant..

Camh remervo

Ilnanclal lnformatlon for ravenue sourcaa

tlnanclal lnfonnatlon for axpendlturm.

Audlt

Dow

nloa

ded

by [

Uni

vers

itaet

sbib

lioth

ek G

iess

en]

at 0

4:30

18

Oct

ober

201

4


Before any specific financial or related managerial variables are assessed, the framework assumes a level of financial management practices that are likely to exist or should exist during each of the three stages. During the first stage, elemental understanding of financial operations are to be expected. Local governments should have some experience with a rudimentary accounting system, be able to track the flow of cash through the system and to make rudimentary decisions regarding allocation of resources. During the second stage, as local governments become managerially more competent and independent, they also have to become fiscally more responsible and accountable. This can be established through having a stabilized accounting system for purposes of control, a fully functional budget process (expenditures and revenues linked), and the development of a financial audit system. The third stage results in a complete system for financial management which an independent system is to maintain. Resource allocation decisions are based on financial and performance information and collection is based on forecasting of revenues. Given the goals of each stage the different financial and related management varibales can now be examined.

Organizational Conditions refers to the overall state of local governments relative to the central government. During the first stage, the local governments are completely subservient to the central government; local governments, having no independent decision making capabilities, are an insignificant part of public sector management and are at best implementation bodies. During the second stage, they gain some control over resources and begin to manage and allocate resources. At the third stage they attain maximum decision making authority and autonomy.

Given the goals and objectives as identified in the outcome of each stage, organizational conditions provide the anchor for determining the corresponding state of structural conditions, financial conditions, and financial management tasks. As these variables are related, they have to be viewed together to determine gaps in the local self-governance process. As gaps are identified

Dow

nloa

ded

by [

Uni

vers

itaet

sbib

lioth

ek G

iess

en]

at 0

4:30

18

Oct

ober

201

4


and corrected, a strengthening of responsibility and accountability of local governments should follow.

Structural Conditions refer to organizational structures in operation or which should be in operation during the different stages of the evolution of local government. Local governments, at the first stage, are totally subservient to the central government and find themselves managed by professionals who normally belong to higher levels of government. Not only are they managed by higher levels of government, but the most important personnel and allocative decisions are made by the higher levels of government. If and where a finance committee consisting of local officials exists, the committee typically acts as a rubber stamp unit. Only cursory training of local government officials and staff is provided.

At the second stage, local governments gain control over personnel decisions by hiring their own staff. At the same time there is reduced dependence on deputized staff from higher levels. Familiarity of the finance committee with the rubber stamping process of the first stage will provide it with the working knowledge to begin to make allocation decisions. In the third and final stage, local governments will be in a position to manage their own affairs because they will have the necessary staff and the institutional knowledge to make independent decisions.

Financial Conditions, similar to structural conditions, refer to the nature of general financial operations of local governments during the three stages. In the first stage, financial responsibilities are entrusted to the central government. Local governments are not held accountable for their finances. Resources are spent by local governments, but are controlled and managed by personnel from higher levels of government. Financially and operationally local governments totally depend on higher levels of government. During the second stage, as local governments gain control over personnel and begin to increase their own resource base, the process begins to shift toward coordinating resources flowing from the top. Through coordination, local governments begin to set

Dow

nloa

ded

by [

Uni

vers

itaet

sbib

lioth

ek G

iess

en]

at 0

4:30

18

Oct

ober

201

4


priorities by allocating resources. Even then higher levels of government can predetermine priorities.

It is at the third stage that local governments attain maximum control over resources whether they are from grants or self-generated. Maximum control refers to local governments' authority to make independent allocative decisions without having to accept predetermined spending plans.

Financial Management Tasks refer to those specific techniques and procedures in operation during the three stages of development of local government. Since the first stage is an introductory stage to local government management, the financial tools and techniques are rudimentary. Local governments need to spend time and effort in overseeing financial record-keeping. They need to become familiar with basic records of where resources are coming from and where they are going, and how cash flows from the central to the local level. During the second stage the techniques will become more complicated as local governments start using accounting procedures such as fund accounting to coordinate their own-source resources with transfer resources. They also will begin to set priorities, for example by deciding how to utilize cash reserves. Rules and regulations regarding budget procedures will have to be developed and adjusted to the decision-making process. In addition, procedures for legal compliance with financial undertakings through both internal and external audit will have to be developed as more independent decisions are made by local governments.

In the third stage financial information (cost) colllection and its utilization for operational and planning purposes have to be undertaken. At this stage the financial management system would allow for development of strategies for advanced accounting and auditing.

CONCLUSION

Local governments in Latin America are mainly at stage two in this developmental framework. Asia is a mixed case, as the

Dow

nloa

ded

by [

Uni

vers

itaet

sbib

lioth

ek G

iess

en]

at 0

4:30

18

Oct

ober

201

4


Philippines provide for local election of key officials and significant revenue responsibility, but the central government still retains considerable control over allocation decisions. Other Asian countries are in transition from stage one to stage two. In Africa, most local governments are in stage one; central governments maintain tight control over personnel, resources and decision- making.

The trend is almost inevitable to assign responsibilities to local governments. The most serious limitation in decentralization initiatives is in the central governments' willingness to yield authority to local governments. Focusing more attention on the budgetary process, as laid out in the developmental framework in Table 1, holds promise for relieving some of the tension in allowing local governments greater authority. While financial management decision-making clearly is a political process, at least the budgetary process has technical and administrative components that can focus attention on strengthening the management capacity at the local level.

REFERENCES

1. United Nations. Prospects of World Urbanization: 1988, United Nations, New York, 1989.

2 . United Nations. World Population Trends and Policies: 1989 Monitoring Report, United Nations, New York,1989, cited in Rondinelli, Dennis and Johnson, Ronald W. "Third World Urbanization and American Foreign Aid Policy: Development Assistance in the 1990s." Policy Studies Review 9 (Winter, 1990): 249.

3. World Bank. Urban Policy and Economic Development: An Agenda for the 1990s, World Bank, Washington, 1990.

4. World Bank. M&wi:Proposed Local Government

Dow

nloa

ded

by [

Uni

vers

itaet

sbib

lioth

ek G

iess

en]

at 0

4:30

18

Oct

ober

201

4


Development Project, Africa Division, World Bank, New York, 1991.

5. Bird, Richard M. Intergovernmental Finance in Colombia: Final Report of the Mission on Intergovernmental Finance, Harvard, Cambridge, MA, 1984.

6. Johnson, Ronald W.; Pereira, Stephen; and Smith, Timothy. Indonesia: Municipal Management Assessment, 1987, US AIDIJakarta, 1988 and Research Triangle Institute, Research Triangle, NC, 1988.

7. Silverman, Jerry M. Public Sector Decentmlization: Economic Policy Refonn and Sector Investment Progmms, World Bank, Africa Technical Department, World Bank, New York, 1990.

8. Rondinelli, Dennis A.; McCullough, James S.; and Johnson, Ronald W. "Analyzing Decentralization Policies in Developing Countries: A Political Economy Framework, " Development and Change 20 (1989): 57-87.

9. World Bank. Road Deteriomtion in Developing Countries: Causes and Remedies, World Bank, Washington, 1988.

10. Bates, Thomas, and Wyatt, Alan S. The Openation and Maintenance of Water Supply Systems in Developing Countries: A Cost Study, WASH Working Paper No. 59, Water and Sanitation For Health Project, U. S. Agency for International Development, Arlington, VA, 1988.

1 1. Johnson, Ronald W. ; Ternet, James A. ; and Pereira, Stephen. Urban Public Works Institutional and Manpower Development Project: Indonesia f'inal Report, Asian Development Bank, Manila, 1988.

Dow

nloa

ded

by [

Uni

vers

itaet

sbib

lioth

ek G

iess

en]

at 0

4:30

18

Oct

ober

201

4


12. Cochrane, Glynne. Policies for Strengthening Local Government in Developing Countries, World Bank Staff Working Paper No. 582, World Bank, Washington, 1983.

13. Gall, Pirie. Local Government Trends and Petfonnance: Assessment of AID'S Involvement in Latin America, Evaluation Special Study No. 17, U.S. Agency for International Development, Washington, 1983.

Dow

nloa

ded

by [

Uni

vers

itaet

sbib

lioth

ek G

iess

en]

at 0

4:30

18

Oct

ober

201

4