“…Decentralization Not Accompanied by Fiscal Decentralization.”

Abebe Zeluel
Urban and Regional Planner

Abebe Zeleul is a senior national advisor at UN-Habitat. He has long years of experience in urban development issues working both for the government and in the private sector. He had worked with the former Ministry of Construction & Urban Development as a member of the strategic advisory committee. His expertise in advisory includes urban planning, quality assurance, policy formulation, legal drafting, strategic plan preparation, and more. He had also served the Addis Ababa City Administration as head of the Land Development Bank & Urban Development office. He has lectured at the Civil Service University and given short-term training on various urban issues. He has published papers and articles in collaboration with various organizations including UN-Habitat on the issues of urbanization and urban development, among others. In this interview with EBR’s Addisu Deresse, Abebe gives his two cents on the challenges facing local revenues in Ethiopia and overall progress in urbanization.

EBR: There is an argument for the need to invest more in urban settings. Does the view hold water in a nation with such reliance on rural agriculture?

Investing in urban settings is profitable in any context. If we were to talk about the population or the geographical size of these settings, they would be insignificant. But, their contribution to GDP in any nation is highly relevant. Even in our country, the government’s ten-year plan acknowledges their contribution to GDP to be 58 PCt when the size and population might just be one percent. The return on investment in urban settings is really relevant. Investing in Addis Ababa obviously doesn’t have the same return as an investment in a rural town. But, the investment must always consider equity, balance, and all the other parameters. Urban settings are important even for the development of rural regions. Urban towns are both the sources of input and market for whatever economic activity there is in the rural setting. That’s why we say investments must prioritize urban settings in any country or in any context.

How do you evaluate the progress of urbanization in Ethiopia in the last few decades?

Our urbanization by and large started during the reign of Emperor Haile Selassie I. It has seen more or less healthy progress ever since. You know, it is always healthy when urbanization and economic growth feed into each other and support one another in their progress. In some countries, like those in Latin America, urbanization comes faster than economic growth, which creates slums and challenges to peace and security, among others. Then came the socialist regime hindering economic growth, especially progress in terms of the market economy philosophy. That unhealthy progress continued until the 1990s. That is also when we worked to create awareness of the role of urbanization, and when we also developed an urban development policy. Urban structures were also highly recognized right about that time period. It was then that the economy began showing double-digit growth, which was in line with the urbanization in progress. Now, even though the data from the Central Statistics Agency says there are only 970 urban towns in Ethiopia, it is actually a lot higher. In fact, there are probably about 2,000 urban towns. I anticipate it will grow even faster going into the near future.

But, we are not saying it is without its own challenges, are we?

Of course, not! There have been challenges in policy and infrastructural support. You know this country has been sending more and more of its citizens to schools and universities. More people going to schools means there is a tendency for citizens to choose cities over rural towns for residence. This creates a burden on city administrations. As we expand educational services, we should have anticipated its impact on cities and worked towards strengthening their infrastructural capacity. These infrastructural capabilities in terms of, for example, the supply and management of land, or in terms of our cities’ capacity of generating their own revenues and managing their finances, all have been challenges and still are. Of course, speaking of challenges, we also have to talk about the war in the north and all the other conflicts that have been breaking out throughout the last few years. These conflicts, for one thing, have been driving migration to cities, and for another destroying cities’ infrastructure. So, yes the challenges have also been there.

They say the more urbanized you are; the richer you are. Can you tell us the relation between the two phenomena in the Ethiopian context: urbanization and economic growth?

If you happen to look at the graph of countries like China with growing urbanization and poverty, you can see the latter dropping deep as the former rises higher. There is no industrialization without urbanization. Not just in China, but it has also worked the same in our country. Since 1995/96, we have seen double-digit growth in Ethiopia, and urbanization has been rising rapidly. Urbanization is also a reflection of the path toward middle-income status. What was ironic in the meantime was how the government has been using this motto –“Our economic growth will be ensured with our rural development.” Or so it sounded. Even agriculture, which is the backbone of the rural economy, will be pulled towards urbanization as it improves and progresses toward modernization.

Let’s talk a little about the revenue collection practices of these urban towns, and cities in Ethiopia. Aid is still significant as a source of finance for Ethiopian cities. As aid is obviously not sustainable, what should states do in terms of strengthening their own local revenues?

Aid is deadly. You might use it at a critical time so that you do not die but can never ensure a sustainable system. The World Bank, for example, has been supporting dozens of towns and cities in Ethiopia in various ways. There has been an effort to base that support on concrete results. Even that support will not go on, it will fade out. Even with the help that has been providing structural support, there has been a trend of presenting false reports simply to keep the support going. Top officials in the administrations of towns and cities must know that it is in their hands to build independent towns and cities. It is unfortunate that I don’t know any city official that has met the goals stipulated in strategies in terms of generating local revenues. Take land leasing, for example. It is one big source of revenue for cities and towns. Chinese cities and towns have taken hundreds of millions of citizens out of hunger using the revenue generated by availing land. In our country, only 15 Pct of the land leased is actually expected to generate revenue. More than 85Pct of the land is given away for activities that do not offer any return for the city or town in terms of revenue, which is not sustainable. Of the 15Pct of land leased out, you see inefficiency in terms of properly managing those leased-out plots and collecting the dues in time.

You can also consider property tax. Property tax was by the way introduced in Ethiopia during the imperial era. Unfortunately, it didn’t go well enough to boost local revenues. Local governments must identify properties and include the majority of them in their tax brackets. I think lawmakers are considering it now. Some other countries like Kenya are also taking advantage of local business fees. This is a kind of revenue for businesses that want to be licensed in that particular town or even district. This was once practiced in our country. Businesses used to pay taxes to towns, cities, and even when they branch out. The idea was abandoned following an argument that it hinders the expansion of businesses, which is a solid argument but no one thought about how to replace those revenues for local administrations.

Take road user fees, too. Automobile plates used to have plates issued by local governments. These are now given to state administrations leaving the revenue of those local governments at the mercy of state structures. Towns hosting tourist and industrial parks do not benefit much from hosting these money-making industries. I remember once a story of a tourist that fell into a deep pit while visiting Lalibela and there was no appropriate healthcare facility to respond to the accident. You don’t blame the absence as there is nothing the local government is benefiting from that tourist. If you go to countries like Morocco, local governments take two to three percent of all tourist hotel bills, which enables them to respond to the demand. Planning development solely based on the revenue collected is not good enough, of course. That is why there are best practices that have to do with issuing bonds or taking sums of loans to invest in projects that will further bring in more revenues ensuring more development. Setting aside these best practices in the rest of the world, Ethiopian towns and cities would benefit a lot more by simply taking full advantage of the revenue items identified by the government.

How do you evaluate the role of fiscal decentralization in the poor mobilization of revenues by Ethiopian cities and towns?

In Ethiopia, unfortunately, political decentralization is not accompanied by fiscal decentralization. When you see the political decentralization, it has reached the level where it seems we are disintegrating. It is a totally different story when it comes to fiscal decentralization. States have political and economic goals but not the means to achieve them. Almost all states, except Addis Ababa, which is not included in the federal subsidy scheme, are dependent on the federal transfer. Own-source revenues do not even cover 35 Pct of their expenditures. When the urbanization policy was developed in 2003, towns were given the authority to cut their own tax rates. But, when they actually decided on their rates, they did it under the umbrella of their respective states. States are in a better position as they are represented at the House of Federation, which is the place where these subsidies are decided. There is a clear formula there, hence, subsidies can be forecasted- giving the states a chance to plan according to their expected subsidies. This doesn’t work in the relationship between state governments and local governments. There, it all depends on what the state thinks local governments local governments deserve.

On the other hand, decentralization might mean a problem in terms of equity. How should Ethiopian regions balance decentralization and equity?

I think a better job has been done at the federal level. As I said earlier, federal transfers have their own calculations. Those calculations, more often than not, try to be equitable in their allocations. Again, the problem is when you go down the structure to local governments, where equity has been challenging to maintain. State governments decide which local government takes what. That decision might depend on the rate of their investment. Compare Hawassa with that of Arba Minch, for example. In terms of potential, or the time when they were established, I don’t see much difference. In fact, I can see Arba Minch better positioned in terms of potential with all that landscape, the national park, and the weather, it has that similarity with that of Cape Town for me, at least. But, you know how far developed Hwassa has been. The regional governments invest where they think will have a good return on their investment, but not on the potential for growth prospects. Of course, equity doesn’t mean some should be given the opportunity for growth at the expense of others. However, state governments must ensure opportunity is given where there is a real potential for growth, and not just base their decisions entirely on return on investment.

Since we have already talked about equity, how do you evaluate the revenue generation practice by Ethiopian cities in terms of the other parameters: elasticity, ease of administration, economic efficiency, and principled changes?

The overall evaluation might require a well-detailed study. However, you can see that most of the practices do not follow sophisticated revenue generation principles. Sometimes city administrations are seen as highly invested in revenue sources that do not even cover their receipt costs. Then, you see sources such as land leasing under-managed even if that is where there is the utmost potential for actual revenue that could be used for high-impact projects. You also witness a serious lack in terms of administrative tools. In South Africa, I have witnessed how they cut your power for every failure to pay your bills whether a water bill or a property tax. They know power is a very sensitive matter and a powerful tool to enforce revenues. They are not only principled but well thought out. If you don’t pay your water bills, for example, they limit your water flow, not cut it. If they cut it, you might catch a disease and contaminate the whole neighborhood, which is another burden on the expenditure side. Ours is too far from that level of sophistication in terms of planning, administration, and enforcement. EBR

11th Year • Nov 2022 • No. 112

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