The efforts of many municipalities in providing services are undermined by ever-increasing deficits: diminishing grants, inadequate revenue, poor revenue mobilisation and collection, unrealistic budgeting and inadequate financial management practices.
The delegation of tasks to the municipal-government level has not always been accompanied by the funds necessary for delivering basic functions. Inter-governmental transfers are discretionary, their amounts are decreasing and they are unpredictable. Municipalities must identify new ways of obtaining revenue for capital and recurrent expenditure. However, in most developing cities the structures needed to improve the primary independent sources of revenue - local taxes and charging - are often missing, and collection systems are non-existent. While sources of revenue for urban government may vary considerably across developing countries, most municipalities suffer from unpredictable and low revenue streams.
Revenue constraints are, typically, worsened by weak financial management practices. Municipalities rarely have the luxury of aiming to maximise efficiency: they struggle to maintain the status quo while trying to meet the new demands of a vast range of stakeholders. High administrative overheads, unrealistic budgeting, accounting arrears and inadequate monitoring all lead to uncontrolled expenditure, matched with inflated annual revenue reporting. Burdensome procedures and simple gaps in skills are manifest in:
• time delays in processing payments due to the hierarchy of accountability structures;
• lack of expertise in cost accounting, which allows trends in unit costs (or comparisons with alternatives) to be tracked;
• lack of accounting methods that match revenue and expenditure at the service level;
• lack of information on assets and liabilities and no procedures for accrual accounting;
• low ability to manage risk and to make service managers accountable for risk; and
• a lack of understanding of the idea of profitability.
Private operators will be keen to form partnerships with municipalities that have improved their financial position and knowledge through reform processes. They, like donors, will be looking for more stable and buoyant revenue streams, sensible budgeting and efforts towards sound financial management. While they are interested in the general state of finance, they will be keen to ensure that particular concerns are put right to minimise their own risks, and these may become conditions of the partnership contract.
Best practice in various parts of the world provides an indication of the types of efforts that can improve the general state of urban government finances. These include:
• strategic planning and budgeting (see discussion in Chapter 4) as an essential part of a reformed financial management system;
• establishing sensible procedures that speed up financial monitoring and reporting, and enable financial management practices to be effectively adopted;
• building sufficient capacity by improving the skills and experience in the accountancy department. This might include, for instance, the introduction of accounting technicians, training in financial awareness for senior managers and
• simpler sessions for lower-grade staff (clerical/executive), drawing on the expertise of construction contract management, allowing greater movements of staff between service and finance departments, and providing business orientation training and promoting secondments to the private sector;
• building revenue mobilisation capacity through professionalisation, credit ratings and municipal bonds; and
• strengthening property tax and tax collection, increasing the frequency and thoroughness of reassessments, simplifying procedures through the introduction of composite area-based assessment (or moving to self-assessment) to reduce the scope for anomalies and corruption.