Revenue Mobilization Remains Headache for Ethiopian Cities

Urban financing – the process of allocating financial resources to support urban development projects – includes the mobilization of public and private funds to finance infrastructure, housing, and economic development initiatives in cities. The major source of revenue for almost all cities and towns in Ethiopia has been the state’s coffers. Fiscal centralization and a lack of financial autonomy have been hindering efforts at revenue collection, while corruption, inefficient infrastructure, and a lack of political commitment have made matters more difficult. Although there have been recent improvements, much remains to be desired in the collection of local revenues, writes EBR’s Addisu Deresse.

In the late afternoon of October 20, 2022 interest groups in urban financing were gathered at The Urban Center to attend a panel on local revenues for Ethiopian towns and cities. Sponsored by UN-Habitat- United Nations program for human settlements and sustainable urban development, and administered by The Urban Center,  a social and professional platform of discussion on urbanization and cities, the event was part of a one-month-long celebration- Urban October.

Urban October (UO) is a month-long annual festival that takes place throughout the majority of the world to promote sustainable urban development with a specific focus on SDG 11, which aims to “make cities inclusive, safe, resilient, and sustainable.” The University of Oregon’s celebrations take on a variety of forms, but they typically center on events, talks, and activities that address urban concerns. It recognizes that urban issues are complex and call for the involvement of many different stakeholder groups, including, among others, international organizations, national governments, municipal governments, academic institutions, and professional associations. With the help of UN-Habitat and its partners, Ethiopia celebrated its first Urban October in 2019. The event was jointly held in the cities of Addis Abeba, Adama, Dire Dawa, Hawassa, Mekelle, and Bahirdar.

The evening’s event brought together urban financing and local revenue experts along with an experience from Kenya and aimed at discussing the practice surrounding local revenue among Ethiopian towns and cities. Urban financing is the process of allocating financial resources to support urban development projects. It includes the mobilization of both public and private funds to finance infrastructure, housing, and economic development initiatives in cities.

Just last week, the Addis Ababa City Administration announced the approval of ETB 100.5 billion budget for the upcoming 2015 Ethiopian budget year (2022/2023 G.C). It is 41.6 Pct higher compared to the budget for the 2014 Ethiopian budget year ( 2021/2022 G.C.). The bulk of the new huge budget (seen from the history of the city’s spending) is allocated for completing capital projects in the city.

Compare that with the budget of the administration during the last fiscal year, ETB XXX billion, of which ETB 33.5 billion Birr was budgeted for capital expenditure and ETB 2.2 billion for other spending. The administration hoped to give more focus on financing housing and infrastructure construction projects as well as creating more job opportunities, expanding transportation services, and improving the water and sewage systems of the city during the fiscal year.

Usually, city officials plan to raise a significant share of their planned budget from tax revenue, and non-tax revenues. Other sources of revenue for these budget lines include loans, road funds, and aid, among others.

Cities finance themselves in various ways, according to Haile Gebreyohannes, a senior Urban revenue, and finance specialist and one of the panelists at The Urban Center. Cities finance themselves through subsidies, own-source revenue, community contributions, external assistance, and domestic loans.

“All of these sources of financing for our cities are either low in amount, or insignificant,” Haile told the panel. “Some others are not reliable while others are very difficult to mobilize.”

Actual Own Source Revenues (OSR) for Ethiopian cities include income from land lease (non-recurrent), trade and professional tax, transfer of title deeds (non-recurrent), and many other low-yield items.

State revenues account for less than 30Pct of the OSR of Ethiopian cities, while lease income accounts for the highest, according to Haile. When annual expenditure accounts for less than 20Pct of the total budget, recurrent budget accounts for greater than 75Pct.

“The implication is obvious: fiscal deficit,” Haile told the panel.

The financing of urban areas has been a challenge for many years. There are a number of factors that contribute to this challenge, including the high cost of land, the need for infrastructure improvements, and the difficulty of attracting private investment. However, there are also a number of innovative financing mechanisms that have been developed in recent years to address these challenges.

One example is the use of tax increment financing (TIF). This tool allows cities to invest in public infrastructure and other improvements within a designated area and then capture a portion of the resulting increase in property values to pay for those investments. This can be an effective way to finance much-needed improvements without putting an undue burden on taxpayers.

Another example is community development financial institutions (CDFIs). These are specialized lenders that provide capital to businesses and projects that are located in underserved communities. CDFIs can help fill gaps in traditional lending markets and provide much-needed funding for projects that might otherwise not get off the ground.

There are many other examples of innovative urban finance mechanisms being used around the world. With continued creativity and ingenuity, it is possible to find ways to finance even the most challenging urban development projects.

Mobilizing local revenue has proved to be far from these best practices, according to Abebe Zeleul, senior national advisor at UN-Habitat and one of the panelists. Cities in Ethiopia are not empowered- there is no fiscal decentralization. OSR for urban local governments is marginal with no clear legal bases. Their potential is not known for a lack of data and data management systems. The rate and bases are narrow and the adhered principles are not clear. Cities are also more dependent on capital, and not sustained revenue sources like land leases.

Sharing his experience of a best practice on the mobilization of local revenues was Dr. Grace Lubaale, a program management officer at UN-Habitat Somaliland, and Manager of the European Union-funded, Berbera Urban Development Project. Dr. Grace became the first responder to the first governor of Kiambu County of Kenya in 2013.

“When Dr. Grace and the first governor took over, the county of six cities had struggled for 35 years seeking change. There had been a struggle between the local and federal governments over resources and the county only had an annual revenue of about USD 12 million for more than two million people.

“The county’s revenue, then, only covered the recurrent expenditures, even which failed short at times,” Dr. Grace later told EBR in a Zoom interview.

Dr. Grace shared a story on how they worked on strengthening the structure and infrastructure of mobilizing local revenues, building robust land revenues, and reforming the county’s structure, among other structural reforms. The mayors’ offices of the six cities in the county were also abolished leaving the entire county under the administration of one governor.

Before the reforms that involved Dr. Grace, the county only had revenue sources of business permits, street parking, and very limited revenue from land rates and markets. “After the reforms, the sources of revenue have diversified including hospitals, business premises, and the county was able to more than double its annual revenue in a little more than two years.”

The rise in the population of the county posed another challenge though. The number of people living in the county increased by half a million in five years leaving a USD1.7 million a day deficit in infrastructure.

A strong IT system in terms of filling, billing, clearance, effective and efficient service delivery in terms of adequately trained staff, and an improved legal framework in terms of harmonized charts of accounts, among other measures, are recommended by Haile for better performance in local revenue collection.

The best practices of urban financing involve creating a sustainable and diversified revenue stream, developing a long-term financial plan, and engaging the community in the process. A sustainable and diversified revenue stream is essential to ensuring that cities have the resources they need to provide services and make investments over the long term. This can be achieved through a combination of tax revenues, user fees, grants, and other sources of funding. It is important to ensure that no single source of revenue dominates the others, as this can create vulnerabilities in tough economic times.

Developing a long-term financial plan is also critical for cities looking to maintain their fiscal health. This includes setting aside funds for unexpected expenses or economic downturns, as well as making strategic investments in areas like infrastructure or workforce development. Having a clear understanding of where money is coming from and where it needs to go will help keep city finances on track.

“Political commitment and direct support both at a regional and national level are indispensable,” Dr. Grace told EBR..EBR

11th Year • Nov 2022 • No. 112

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