This desk study examines the support to Local Government Capital Development Grants (LGCDG) System in Tanzania as a case study of Sector Budget Support.

Sector Context

In 1998, the Government of Tanzania embarked on a Local Government Reform Programme (LGRP) that since 2000 has been supported through a basket funded arrangement. The LGRP has focused on reform of the systems for LG finance, human resources LG legislation as well as provision of generic capacity building to the 133 Local Government Authorities (LGAs). However, the LGRP did not include support to LGAs for development funding. Up until 2004 LGAs relied almost entirely on selected sector projects or various Area Based Programmes funded by bilateral donors for their development funds. LGAs own revenue was highly inadequate for financing development needs, and transfers from Government budget to LGAs for development purposes were either highly earmarked or very low.

The Nature of Sector Budget Support

The LGCDG system was introduced in 2004, after a long design process, as a modality for devolution of development budgets to LGAs. The LGCDG system is to a large extent modelled on the experience of the Ugandan Local Government Development Programme. The LGCDG is a discretionary development grant provided to LGAs according to a formula and annual assessments of their institutional performance. The assessment reviews LGAs capacities in key functional areas such as planning, budgeting, procurement, financial management, revenue generation as well as transparency and accountability. The LGAs that fulfil the basic minimum conditions are eligible to access the development grant, whereas those LGAs that fail have to wait another year to fulfil the conditions. All LGAs are given a discretionary capacity building grant that enables them to build basic capacity for future access to the development fund.

Donor support to the LGCDG combines both conventional project support, traceable earmarked sector budget support to fund the LGCDG, and the associated capacity building grant. SBS funds are channelled through treasury to LGAs and follow Government procedures for procurement, financial management and financial reporting. Also, additional procedures for output reporting were introduced. The LCDG was initially funded by the World Bank and later from other donors. The size of the core discretionary LGCDG grant is 1.5 USD per capita, but soon after its introduction, it was joined by “sector windows” and total budget allocations for the 2008/09 FY through the LGCDG system rose to almost 200 million USD – close to 6.5 USD/capita. This constitutes the most significant part of development financing for local service delivery in Tanzania.

The LGCDG system has developed over four main phases

• The introduction of the LGDCG in 2004 was financed via the World Bank-funded Local Government Support Project, which only included a third of all LGAs in Tanzania,
• A rapid expansion in 2005 when all LGAs were included as other Development Partners joined financing the LGCDG. This was accompanied by a concurrent closure of most of the previous area based development projects. The previous project management unit in PMORALG that had managed the LGCDG system was from 2006/7 abandoned and mainstreamed into the PMO-RALG.
• A process of integration of sector funds (agriculture, water etc) into the LGCDG system that greatly expanded the volume of development finance to local governments but also created some challenges in terms of effective “mainstreaming”.
• A new phase of support commenced in 2008, where agreement was reached on increasing to near-full Government financing of the LGCDG (with subsequent and gradual deduction of earmarked donor funding).

The Effects of Sector Budget Support

The effects have mainly been in four areas:

• Firstly, SBS supported the introduction of a system for transparent allocation of development resources to LGAs based on existing Government procedures. This provided a firm basis for continued reform and improvement of the intergovernmental fiscal framework. It also contributed significantly to reduction of transaction costs, as development partners discontinued separate Area Based projects in favour of joint financing to the LGCDG system.
• Secondly, SBS supported the introduction of discretionary development funding to LGAs that has enhanced citizen and councillor participation in planning and budget processes. The design of the LGCDG required higher-level LGAs (e.g. districts, municipalities) to allow lower level LGAs (wards and villages) to independently plan for 50% of the grants. The promising trends of participatory local planning have however been curtailed by significant Central Government and CCM (party) instructions regarding budget priorities. The significant emphasis on secondary classroom construction is a result of these instructions.
• Thirdly, the LGCDG has increased available development funding at local levels – this has resulted in a significant number of locally implemented development projects. Between 2004 and 2007, it funded over 4600 individual projects, including the construction of classrooms, roads and clinics as well development activities such as tree planting and health campaigns. The discretionary local development funds have foremost been spent on secondary education, but also on primary education, health facilities, as well as markets and administrative infrastructures have been implemented. The value for money and quality of works is generally considered satisfactory. However, the monitoring system is not capable of providing much detail on the specifics of either individual projects or service delivery impacts. Impact of the sector specific windows – in particular on agriculture and water is too early to judge.
• Fourthly, the LGCDG has with the annual assessment system provided an incentive framework for LGAs that also has enabled a more demand driven approach to capacity building. This system has led to significant improvements in LGAs capacities and their adherence to regulations, in particular for procurement and financial management. The assessment system provides for a detailed account of the improvements which is reflected in reports from the National Audit Office.

Overall, the LGCDG has contributed significantly to the expansion of local service delivery infrastructure and development activities in Tanzania. Results from the Mid Term review of the LGCDG also indicated that LGCDG provided reasonable value for money. SBS support to the LCDG has therefore contributed to increased access to services in an efficient manner and to improved service delivery outcomes more broadly through strengthening local systems. However, the extent and sustainability of these benefits are undermined by weak inter-sectoral coordination and failure to plan for the recurrent implications of investments.

Conclusion and Recommendations

The overall conclusion of the study is that the LGCDG has been very successful in meeting its intended objectives. Neither continued support through area-based projects nor General Budget Support on its own could have achieved the same results – SBS was the most appropriate instrument in this particular area and time. Area based support would not have been able to influence wider systems development or be as effective as LGCDG in building capacities of LGAs. GBS, in the absence of a sound Intergovernmental Fiscal Framework (as spearheaded by LGCDG), would not have led to the significant improvements in local governance and transparency in local level resource allocations. The systems for devolution of development budget to LGAs were simply not in place. After some years of LGCDG implementation, the system is now to a large extent in place. It also has strong ownership from Government. This is indicated by the agreement reached to reduce of donor funding to the system gradually and to use GoT funding replace this and increase the total size of the grant (albeit partially funded via GBS).

However some issues still remain as challenges:

1. Some wider aspects of local government reforms have not progressed in spite of being discussed in relation to LGCDG – this relates foremost to the lack of progress in decentralisation of human resource management in LGAs, which again prevents full implementation of wider LG fiscal reforms (formula based allocation of personal emoluments and other charges). Progress in this area requires a more concerted effort for reform coordination between PO-PSM, PMO-RALG and MOFEA as suggested in the proposed new phase of LGRP to start in 2009.
2. Government systems for M&E of LGA plans and budgets require much further strengthening before adequate information can be synthesized on service delivery outputs and outcomes.
3. Coordination with sector programmes (health, agriculture, roads etc) requires improvement. While there have been several achievements within a very short time regarding development of sector grants to LGAs within the overall LGCDG framework, it is evident that there still are tensions between the “LG sector” and service delivery sectors. Objectives of furthering local government’s autonomy and building cross-sectoral/generic systems are typically inconsistent with the service delivery sectors’ desire for sector earmarking of funds and a range of sector specific institutional and reporting requirements.