Challenges of Self-Financing of Local Government (Case of Mogadishu Local Government)

CHALLENGES OF SELF-FINANCING OF LOCAL GOVERNMENT 1

Challengesof Self-Financing of Local Government (Case of Mogadishu LocalGovernment)

Abstract

Local governmentthat has power to self-finance promotes socioeconomic development andit creates an environments where local communities have access to getbasic services and it also enhances the responsiveness of governmentto the citizens. There have been efforts of local government tofinance itself but the struggle ended up expenditures exceeded thanrevenues and it was a time that the central government has notcapacity to transfer funds to fill the balance gaps the solution wasreduction of local government spending (low salary/lack of salary ofmunicipal servants) and decline of basic service deliveries.

This paper examinesthe key current sources of financing local governments as well as theexisting source of finance that were not being utilized yet due toprevailing challenges.

The study exploresthe exercise and mechanisms of taxing system, revenues collectionstrategies, weak or lack of fiscal decentralization and incompetentcollection enforcement.

Somalia has not yetcreate up to date data base of taxable sources such as commercial,residential, and agricultural sectors and its difficult for the localgovernment to promote self-financing strategies unless to removebarriers of classic by placing more sophisticated collection ofrevenue as well as creating new sources of finance.

Key words: LocalGovernment, Self-financing, Revenue, Tax, Decentralization

Localauthority refers to administrative bodies that are officiallymandated to handle all public services within specific geographicalareas for example, cities, municipalities, towns, boards, andcounties. Local authorities are responsible for the provision ofpublic services to the locals through funds’ utilization generatedfrom the local residents, and in addition to grants and loans fromthe central government (Chernick &amp Reschovsky, 2006). To ensurelocal authorities execute their functions effectively, a wide, butsecure and buoyant financial base is very critical (Bird &amp Slack,1993). The local authorities should also be in possession of liberalmodicum to be in a better position to alter composition and level oftheir sources of revenue in regard to fiscal decentralization logic.According to Fox &amp Gurley (2006), Fiscal decentralization helpsdevolve spending powers and taxing from the central governmentauthorities control to government authorities, especially at thesub-national levels.

Fiscaldecentralization entails sources of revenue, levels of expenditure,and tax rates determination, and according to Kubler &amp Rochat(2010), most of the local government system of collection strives toachieve certain goals namely safeguard the cash from the government,accelerate available funds’ receipts, and keeping a minimum ofbanking costs. The collection systems within the local authorityvary depending on the size within the jurisdiction, the nature ofreceived revenues, and the acceptable payment methods (Magala &ampRubagumya, 2005). The revenues’ core sources can therefore beclassified into internal and external however, over-reliance of theexternal sources elevates the central government’s dominance on thelocal authority, which in turn reduces them to a mere authoritywithout finances.

Challengesof Self-Financing of Local Government (Case of Mogadishu LocalGovernment)

Mogadishulocal government is no exception to challenges that face localgovernments. Since local governments are assigned the role of payingfor the goods and services to its residents within a specifiedgeographical area, these residents are therefore required to pay forthem (Weeks et al., 2009). These local governments experiencenumerous challenges, which most of them are related to revenuecollection among others. Since Somalia has not, until today, createdan up to date database system of collecting revenues of taxablesources for example, agricultural and commercial sectors, it istherefore a challenge for Mogadishu local government to facilitatesmooth financing strategies (Myers &amp Dietz, 2002). It is unlessthe local government places a more advanced revenue collectionsystem, while it aims at creating new financial sources.

Fig 1: Differencein the year against percentages of cost and wages

Currently, theMogadishu local government struggles with its self-financing becauseof poor methods of revenue collection and infringed sources ofself-financing. The main source of local government finances comesfrom the national government of Somalia. With numerous challengesthat are experienced in Mogadishu, there are minimal incomegenerating projects put in place, however other sources includeintergovernmental transfers (ITGs) is one of the main facets offinancing. The local government also borrows as part of accessingprivate capital.

According to Roy (1999), Mogadishu local government borrows moneyfrom various institutions including the government and NGOs, howevermuch limited it is. Sources of financing such as borrowing fromprivate entities are not fully utilized by the Mogadishu localgovernment because of the poor borrowing system in place. Inaddition, the local government lacks well-developed credit worthinessand financial markets to execute the process (Thirsk &amp Whalley,2009). Again, collection of property tax does not exist since mobileassets census is not fixed neither does maintenance of properregister to avail information of the exact value of property withinthe capital. With the current revenue collection system put in place,Mogadishu local government experience challenges to its revenuescollection strategies, taxing system mechanism, and weak fiscaldecentralization (Thirsk, 1987). These challenges have since resultedto the following amount of revenues from its current revenues source,which makes it difficult to facilitate most of its activities.

Fig. 2: Current sources of Revenues of Mogadishu Local Government

Sources of Revenues

2013

2014

Markets

212,291.65

401,553.05

Other (livestock, Bajaj, Checkpoints, Khat, mines)

1,127,976.86

1,980,700.27

Business license

378,977.50

431,286.00

Fines and forfeitures

Public registration

886.00

224,871.00

Registration of NGO and Companies

48,966.00

59,500.00

Land and building permits

970,779.35

1,015,304.50

Plate No. and driving license

55,026.70

87,083.50

Intergovernmental transfers

7,487,366.41

8,750,382.41

Conditional grants

Total Revenue

10,282,270.47

12,950, 680.58

Collection cost

3, 598, 794.66

4,532, 738.20

Salary and Wages

2, 741, 006.21

4,748,831.75

The cost of revenue collection incurred by the Mogadishu localgovernment is nearly a quarter of the total revenue collected becauseof the challenges faced.

Challengesto Self-Financing

Security: Security is the main challenge to Mogadishu localgovernment’s revenue collection because of lack of enough financesto reach certain places. Considering the local government is seen tohave greater ability in collection of taxes across the capital,security problem have led to most of the officials killed (Sano &ampAlfredsson, 2002). Security concerns have also led to some of theofficials from the revenue collection department be killed because oftax eversion strategies by the locals and the organized groups suchas the al-Shabaab militants.

The extremist groupal-Shabaab has in recent times claimed hundreds of killings ofinnocent lives within the capital, with major bombings reported insome of the buildings. In response to African Union’s encroachmentof their base, they have since launched fresh attacks on businessresidents inside Mogadishu (Name, YEAR). Mogadishu local governmenthas not been spared either. With attacks and killings inside thecapital, it has since become difficult for the local government toconduct its revenues collection activities (Parker, 2010).Additionally, with numerous business premises attacked, fear has rockthe entire capital prompting the residents to shun their businessactivities for fear of their lives. All this have contributed tominimal revenues collection as a result of lack of proper systems andsecurity challenges.

Lack ofcommunity awareness: Somalia is one of the few countries withlack of community awareness on tax payment. Majority of the peoplealso do not like paying because the countries’ history neveradvocated for the importance of paying taxes (Mulindabingwi &ampSinger, 2005). Somalia, until recently, had an unstable governmentwith inexistence of non-sophisticated government systems to cub taxeversion by its citizens. Currently, tax payment awareness is takingits toll on the local government since most of the capital’sactivities are not executed well due to lack of adequate funds.

Additionally, thereis also limited awareness on the importance of tax collection. Thelocals in Mogadishu fear for their contribution to the localgovernment citing corruption and minimal evidence of the use ofrevenues (Youngman, 2001). Majority of the locals believe that theirmoney would go directly to individual pockets with not clearstructure put in place. The challenge is as a result of unstablelocal government system, and according to Mbetu (1997), Mogadishulocal government has not done much to ensure awareness is executed inevery part of the capital to increase revenue collection.

Lack of taxableproperties census and community centers: Mogadishu localgovernment is in no position within the country’s jurisdiction tocarry out registration of all sources of commercial centers andtaxable properties because of the failure of the difficulty from thegovernment to conduct census (Local Government and Decentralization,2009). The difficulty is as a result of security challenges faced,lack of enough funds considering the process is tedious andexpensive. As a result, Mogadishu has numerous operational businesscenters that do not pay any taxes (Slootweg et al., 2007). Forinstance, the taxation department direction during my survey confidein me that he managed to only register 229 business centers in theentire Hamarjabjab district and a total of 40 centers only tookbusiness licenses.

Lack ofmunicipal soldiers: Collection of taxes is a tedious anddemanding task. Survey conducted in Mogadishu revealed that there arefew or no municipal soldiers at all to ensure those refusing to paytaxes are arrested and charged. Several factors contribute to thisphenomenon (Slack, 2010). First, security in Mogadishu is a bigproblem, which has resulted in huge population of municipal soldierskilled. The extremist group has vast in the area prompting theremaining soldiers abandon their duties (Hyman, 1990). Additionally,lack of municipal soldiers is due to lack of enough finances to paythem, which is also because of limited collection of revenues.

The policy makersare mandated to come up with a plan on how to develop functioningrevenue collection systems, but from the survey conduction on thelocal government, there is reluctance and contentment on the amountof revenue collected. The reason for their contentment is because thelocal government has not budget, which will offer direction thatwould cover their proposed budget. The study also shows that thelocal government spends total amount received from revenuecollection, and according to Due &amp Mikesell (1994), when therevenue becomes insufficient in meeting their needs, they reduce theemployees’ salary, or decrease the employees’ number, or theyreduce or totally stops sanitation services, community support, andstreet lights.

Property taxes,user charges sales, and land sales taxes: Mogadishu localgovernment does not collect its revenues from these sources likemajority of other local governments. This is a challenge on theability of the local government to self-finance its operations(Chernick et al., 2010). The above revenue sources inflict heavyburden on the ordinary citizens if executed because exorbitant feesare demanded. Again, lack of well-established property is anotherreason for lack of such exercise (Bordignon et al., 2001). Lack of orminimal revenue collection is also a challenge to payment of enoughtrained staff, and people usually feel this form of employment basedon the Somali context. The lack of awareness also plays a role insensitizing the locals on what the employment entails.

Finally, Mogadishuas the capital of Somalia, experience disputes between the centraland local government in relation to collection of revenue. Thedisputes is related to lack of tax laws, which mentions the kind oftaxes the local government is supposed to collect and the kind thecentral government handles (Banigana, 2007). Currently, there is acompromise through the use of socialist systems laws from thepre-civil wars.

Conclusionand Recommendations

Under thefiscal decentralization, developing countries like Somalia have sincebeen presented with self-financing powers. Reasons for this are as aresult of relation to the challenges in collection of revenues fromall spheres for self-financing. Mogadishu local government forinstance has a range of challenges from security issues as the mainchallenge to lack of awareness and advanced revenue collectionmethods among others. Inability of the local government toself-finance is attributed to some of the interlocking factors(Slack, 2002). Such factors include inhospitable social contexts,unwelcoming environment, overreliance on minimal taxes collection,lack of enough tax generating ventures, and failure to developoptimizing revenue strategies.

The government ofSomali should therefore come up with strategies and structures tosolve security issues, which include seeking financial help from thedeveloped countries to hire more security officers. Secondly, thelocal government should built sustainable markets, which will helpcontribute to increase in the amount of revenue collection (Slack,2007). Since there is CIP in Mogadishu, the local government shouldtherefore developmental projects, either large or small, with the aimof improving CIP to facilitate increase trust from the communitythis way, the community will be willing to pay taxes to facilitatevarious projects (Schou, 2000). The local government should alsosought out consultation and collaboration from the governmentallevels and other actors to help strengthen the local finance systemsfor efficient collection of revenue.

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