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Time to repurpose local governments for fiscal resilience

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Local governments shouldn’t be solely administrative but position their districts as strategic investment hubs

COMMENT | WALTER AKENA | Local governments in Uganda have traditionally functioned as administrative entities, responsible for delivering public services to citizens within their jurisdictions. However, they have grappled with financial difficulties. Despite experiencing a minor rise in local revenue generation with the introduction of digitised revenue management, this has essentially been a drop in the ocean, as their revenue fund barely 5% of their annual expenses. Moreover, the proportion of the national budget that goes to local governments has decreased from 22% in FY 2010/11 to 9.8% in FY 2023/24, according to a recent study by ACODE.

This conundrum severely encumbers the ability of local governments to provide essential services and invest in critical infrastructure. As a result, it compromises the quality of public service delivered to the citizens; underscoring the urgent need for local governments to embrace an investment-oriented model to address financial constraints and promote fiscal resilience.

One way of transitioning to a more business-oriented model is through the implementation of the local economic development (LED) policy. Adopted in 2006 as the sixth objective of decentralisation, the policy creates opportunities for local governments to increase private sector investments, employment, and household incomes. This, in turn, allows local governments to benefit from increased tax revenue and rates collected from the business community. Local governments must implement strategic interventions to make their districts attractive places for investment. These interventions should aim to lower production costs, enhance international and local competitiveness, and facilitate the sustainable exploitation of development opportunities.

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The benefits of embracing LED are evident; for example, in 2016, Gulu District partnered with the private sector by leasing district assets to organisations such as the Uganda Management Institute, Toyota Uganda, and U-Touch Company, among others. This resulted in a significant increase in annual revenue for the district, from Shs500 million to over a billion shillings. Similarly, Arua City authorities collaborated with a private construction firm and the business community to commence construction of the Arua Stadium. For all its benefits, implementation of LED has been sluggish in many local governments. This is due to factors such as inadequate technical capacities, a shortage of dedicated staff, limited stakeholder involvement, low awareness, and limited information, which must be urgently addressed.

Local governments can, themselves, become business entities by embarking on income-generating projects. For example, Kaliro District planted pine trees on a 20-acre piece of land in 2007, and the trees are now ready for harvesting and sale. The district plans to use the proceeds to fund the construction of the district headquarters and invest in a sports facility and a 10-acre avocado plantation. The avocado project is expected to yield Shs350 million annually, and the sports facility could earn an additional Shs200 million in rent.

Sheema District started a banana plantation project in 2017, which generates around Shs80 million annually. The district plans to reinvest some of this money to expand into a demonstration farm with dairy cattle, coffee seedling multiplication, and pine trees, potentially earning over a billion shillings.

These examples demonstrate how local governments can expand revenue streams through creative income-generating initiatives to become fiscally resilient. Paragraph 27 of the 5th schedule to the Local Governments Act grants local governments the authority to invest council funds with council approval. However, to fully utilize this provision, an amendment to Section 34 (6) of the Public Finance Management Act is necessary, as it currently restricts the investment powers of local government councils.

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A shift in mindset by local government leaders, from perceiving themselves solely as administrative entities to positioning their districts as strategic investment hubs, will set local governments on the path to fiscal resilience. This requires a comprehensive and well-coordinated approach, including developing strong investment strategies, collaborating with the private sector, and establishing transparent governance mechanisms.

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The writer is a Research Officer under the Local Government Council Scorecard Initiative at ACODE

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