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revenue and expenditure

Fiscal In-flow
The inflows of resource into the coffers of KMA come from three major sources.
  • Internally Generated Funds (IGF)
  • Transfers from Central Government
  • Transfer from International Sources.
Internally Generated Funds
The authority to generate revenues from the Metropolis comes from Local Government Act 462, 1993.  For example, section 86 of the Act gives a catalogue of items on which the Assembly could impose local taxes and levies.  In addition sections 33, 34, 50 60, 76, 74, 85, 95 and 99 empower the Assembly to raise internal revenue.

Interpretation of the Legal Provisions
Based on the legal provisions above, the Assembly has developed a fiscal structure, which is the basis for internally generated funds (IGF).  The Assembly has therefore identified about eighty-four revenue items.  The significance of the numerous items for revenue generation has been a source of concern because of the financial and non-financial implications for revenue generation.
Table 11 presents the revenue structure of KMA, the number of revenue items in each source and the contributions by source for the year.

The table indicates that many revenue items of the Assembly are not productive.  This is by virtue of the fact that some seventeen (17) items provide about 77% of total revenue.  The remaining 23% comes from sixty-seven (67) items.  This is a pointer to the fact that the Assembly is wasting a lot of resources on several unproductive items.

Major Characteristics of the IGF
Again it has been established that the growth rate of the revenue items are generally low ranging between negative 32% and 7%.  The elasticities of the Metropolitan taxes are equally low with respect to population growth, income and price levels.  Furthermore, the internally generated funds are quite unstable.  These trends give rise to problems in financial planning for the Assembly.

Revenue Collection
The inflow of fiscal resources is directly related to revenue collection effort of the Assembly.  Therefore, the failure of the Assembly to introduce effective machinery for collection means low inflow.  Currently, the Assembly is using three (3) main approaches for revenue collection.
  • The Assembly has employees who are responsible for revenue collection. These revenue collectors are on monthly salaries.  The income is not related to performance and hence has little or no motivation for good performance.
  • The Assembly has contracted some private revenue collectors who are paid on commission basis. They receive 10% on each unit of revenue collected.
  • The Assembly has ceded portions of its tax collection responsibilities to identifiable organizations to collect revenues on commission basis.
The involvement of the private collectors is a good idea, but for the two major evils associated with the approach.  In the first place, the 10 per cent commission paid to the collectors is high as generally an acceptable cost of collection is about 3 per cent. Again, the Assembly has no basis for checking the authenticity of the revenue collected.  This gives the collectors freedom to under declare revenue to the Assembly.

Revenue Performance
Assuming the estimation model of the Assembly is highly dependable, performance in revenue generation is measured by the gap between the estimated and the actual revenue collected.   In other words revenue performance is the rate of achievement in collection.
Table 12 shows the achievement rate of the sources of internally generated funds of the Assembly.

The estimate of investment revenue, miscellaneous revenue and rent are not realistic since it is usually difficult to foresee what these could be until they are realized.   This explains the seeming over collection.
Analysis of Performance
The major sources of revenue to the Assembly are rates (property rate, basic rate), fees and fines (market fees), licences and lands.  Fees and fines are ranked first, followed by rates, licence and lands in that order.

From the period 2001 to 2005, fees and fines, rates, licence and lands contributed an average of 34.3%, 27.6%, 19.5% and 9.4% respectively to internally generated revenue of the Assembly. These four revenue areas contributed a total of about 90.8% of the IGF.  The remaining 9.2% emanated from rent, investment and miscellaneous items.

The salient features of the Assembly’s Internal Sources of revenue are the fluctuating nature and that only a few sub-heads are productive and cost effective.  For example, in 2004, three sub-heads accounted for over 92% of the Fees and Fines whilst in 2005 they accounted for over 91% of the same head.  The situation for the four major revenue heads for 2004 and 2005 has been summarized below:

The proportion of revenue from property rates is expected to go up upon the completion of the Revaluation Exercise of properties in the metropolis, which was started in 2005.  When completed it could then play its traditional role of being the Balancing factor in budgeting.
Analysis of the income structure of the Assembly for the period 2001 to 2005 reveal that Transfers (General Grant, DACF, HIPC) and IGF accounted for 67.5% and 32.5% respectively.  By inference, the Assembly over depends on the former for financing its activities.

This scenario could change if the latter (IGF) is improved through a conscious attempt at an accelerated revenue growth.  The floating of municipal bonds and stocks could also improve the financial status of the assembly.

Transfers from Central Government
The Central Government transfers money to the Assembly for the financing of both recurrent and development expenditures.  These transfers constitute about 67.5 per cent of the total income of the Assembly.  The general grant is for financing recurrent expenditure especially salaries.

The District Assembly Common Fund (DACF) is for development expenditure financing.   Table 13 shows the structure of the Assembly’s total income from 2001 – 2005.

Expenditure Financing
The major expenditure items are;
  • Personal emoluments; these includes salary and wages, overtime allowances and social security contributions for employees.
  • Operational expenditures.  These cover items such as Travel and Transport allowances, per diem and general expenses.  Payment for utilities, telephones etc.
  • Maintenance and Repairs.  These cover costs of maintaining office machine, furniture and other facilities.
These items constitute the recurrent expenditure of the Assembly.  In addition to these items are two other expenditure items.  These are locally financed capital expenditure and capital expenditure financed through external sources such as the DACF.
  • Between 2001 and 2005 an average of 41% of total expenditure was recurrent
  • Capital expenditure covered an average of 59% of total expenditure.  The examples of popular capital expenditures are those on Assembly buildings, vehicles, equipment for waste management and projects within the social sector such as schools, health and housing.
  • The average annual expenditure growth rate from 2001 – 2005 is estimated at 33.3% as against 32.9% for revenue.
Financing Recurrent and Capital Budget
The recurrent budget is financed through IGF, grants and ceded revenue. It is estimated that IGF finances on the average about 65.8% of the total budget. It is further estimated that the total IGF finances on the average about 79% of the recurrent budget. That leaves a gap of 21% points between IGF and recurrent expenditure of the Assembly, which is normally filled by the Central Government.
The capital budget is financed mainly by transfers from the Central Government through the DACF and HIPC Funds. By implication, development in the Metropolis is dependent upon transfers. This situation is by virtue of the weak revenue mobilization system of the Assembly. The role of bilateral and multilateral organizations in capital budget financing cannot be overlooked. Specific examples of this method of financing in the Metropolis include:
  • Urban Environmental Sanitation Programme (UESP1) and currently UESP II under the sponsorship of the World Bank, Ghana Government, KMA and beneficiaries. The project concentrated on Waste Management and access road in poor suburbs of the metropolis
  • European Union (EU) Micro Projects in the Metropolis financed market infrastructure, places of convenience and schools with counterpart funding from the assembly and communities. 
  • The system of city twinning where Kumasi has linked up with other sister cities in the developed world is also useful. The developed cities finance projects chiefly in the social sector or provide technical support.
  • Capital financing in the Metropolis is therefore essentially driven by external sponsorship.
Free Balance and its Implication on Development
The Free Balance measures the size of the part of the Assembly’s internal revenue that is not tied by law for a particular programme or otherwise and for that reason could be used to finance new development projects.  It gives policy makers an idea about the size of new projects that could be financed from the Assembly’s own resources.  It is calculated from the totals of Uncommitted Revenue and Committed.  In sum, the free balance technique helps the Assembly to estimate its absorptive capacity and also to identify its revenue and expenditure management problems.

Uncommitted revenue simply refers to the traditional sources of revenue to the Assembly (IGF), which include Rates, Lands, Fees/Fines, Licenses, Rent, Investment and Miscellaneous.  Committed Expenditure on the other hand, refers to the expenditure that the Assembly is duty bound to spend on.  These include Personal Emoluments, Traveling and Transport, General Expenditure, Maintenance, Repairs and Renewals.  Expenditure like Personal Emolument which takes up the greatest percentage of the Committed Expenditure cannot be controlled.  However, control can be exercised on the others.
Cash Management
Relates to the assembly‘s system of cash inflow and outflow. Records indicate that about 90 per cent of the Assembly’s cash balance is in current account. Although that is not bad in itself, the fact that the Assembly does not earn interest on current account makes the system uneconomical. This system of cash management has to be reviewed.

Financial Control
The   Metropolitan Chief Executive is at the centre of financial management of the Assembly and authorizes all expenditures. In the event of procurement of certain categories of goods and services, the Metro Tender Entity and the Metro Tender Review Board are entreated by the Public Procurement Act, Act 663, 2003 to procure. 
Financial indicators in Table 15 show the comparative performance of the various revenue items of the Assembly from 2001-2004 during the second generation of Medium Term Development Plan.

Financial autonomy Index: this is the ratio of the IGF to total income.
Local Finance Support: this is the ratio of IGF to total Expenditure.
Financing Ability Index: this is the ratio of IGF growth rate to expenditure growth rate and
Revenue Performance Index: the proportion of estimated revenue collected.
Table 15 shows that KMA was worst off during the plan period as (3) three out of the four (4) indicators showed a downward trend. The foregoing analysis brings into sharp focus some   of the important issues that have to be examined when preparing subsequent medium term as well as long term plans for the Assembly.

Current Challenges
  • Under declaration of revenue by collectors
  • IGF are quite unstable
  • Low level IGF Performance to total revenue generation
  • Low level of property rate generation
  • Low educational background of collectors
  • Poor estimation of revenue to be collected
  • Poor expenditure control
  • Low levels of motivation
  • Absence of incentive packages for hardworking and performing revenue collectors
  • Weak Management Information System (MIS)
  • Inability to leverage other sources of funds through private capital
  • Low tax base.
  • High recurrent expenditure
  • Weak monitoring system
Financial Projects Earmarked for Implementation by KMA
Municipal Bond Financing
KMA intends to overhaul its machinery for revenue mobilisation to enable it carry out its mandate as enshrined in the Local Government Act, Act 462, 1993, Legislative Instruments (LI) 1614.

To this end preparatory work has commenced to enable it enter the financial market by way of Municipal Bond Financing in a bid to leverage capital from the private sector and invest in projects that have multiplier effect and capable of generating funds for a payback. This initiative is being coordinated by MLGRD&E.

For tables refer to pdf file attached

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