Chapter 7 Revenue Enhancement Plan

7.1 Introduction
 What is a REP?
❖ A REP analyses past revenue performance and
demonstrates which financial resources are needed
in the coming three years and how the city will
generate this amount.
❖ This means that a clear strategy should be
presented, detailing from which sources urban
administrations can generate their own revenues to
cover their expenses.
How is the REP linked to strategic objectives?
❖ All cities in Ethiopia have development plans, consisting of
strategic development objectives and structure plans.
❖ City development plans include physical and spatial
objectives.
❖ This plan is then translated into the yearly action plan of
city line-offices.
❖ In these yearly plans, the line offices submit a budget
proposal including a recurrent and capital budget.
❖ These proposals and other capital projects, such as the
rehabilitation of assets are listed in the Asset Management
Plan
❖ Second function of this plan is to manage existing
infrastructure by determining maintenance requirements and
costs, which are then consolidated in the maintenance
budget.
❖ However, not all wishes from the AMP can be fulfilled.
❖In order to match available resources with investment
needs, the city with the participation of its citizens will
priorities capital investments proposals and list practical and
financeable investments in its capital investment plan (CIP).
❖The CIP is linked with the city’s physical and financial
objectives.
❖Both capital investments and maintenance expenditures
require financial resources, which are to be generated by
the Revenue Authority as planned in the REP.
❖Therefore, at the beginning of each calculation the amount
of available revenues should be indicated.
❖By subtracting the recurrent expenditures the city
administration can calculate its operating surplus, i.e., own
resources available for capital investments.
❖In Ethiopia, many external resources by the federal
government or by donors add to this and are available for
the CIP.
 7.2 Considerations before REP drafting
❖ Each municipality must bear in mind that their REP
should be:
✓ in line with the requirements of the federal and
regional constitutions and
✓ not contradict the framework of national laws when
it devises its own local financial improvement
policies.
❖ The established federal and regional policy framework
aims at reducing conflicts, uncertainties and
misunderstandings by providing guidance and
instructions on how to deal with financial matters in
LGs.
❖ City administrations need to consult the following set of
policies and government reform programs:
• Fiscal Policy
• Tax and Investment Policies
• Urban Development Policy
• Civil Services Reform
• Tax Reform
❖ Further, they need to gather and integrate regional and local
frameworks.
❖ In order to prepare the REP, a task force has to be set up,
comprising of a pool of experts from different disciplines.
 Respect legal system in place
❖ The following policies are the most important and should
be considered while preparing municipality REPs.
Fiscal • Mobilization of own revenue is a necessity but can also
Policy obstruct economic growth if citizens are over-taxed;
• Management of own revenue and expenditure of a local
government should contribute to a fair distribution of
income and wealth between citizens;
• REPs should not negatively affect the stability of the local
economy, employment and inflation. These plans should not
impair the allocation of local resources;
• City administrations are required to follow sound financial
principles that strengthen fiscal responsibility, ensure
sustainability of resources and spending, apply limits to local
expenditure and create meaningful relations between local
policy and expenditure patterns. Value for money should be
produced through transparency and accountability.
Tax and • REPs should not contradict the federal and
Investment regional investment and tax policies, which
Policies provide incentives to smallholder farmers,
domestic entrepreneurs and direct foreign
investors, stimulating in turn economic
growth and prosperity;
• The private sector should be strongly
supported by transparent and accountable
services rendered with regard to delivery
and pricing.
Urban • City administrations should use different methods for the
Develop- full recovery of land development costs such as:
- an appreciation tax for increases in land values;
ment
- full cost recovery charges for the capital costs of
Policy services provided to their estate; and
- public acquisition and development of land.
• City administrations should apply charges and fees (cost
sharing principle) reasonably well on occupants of new
areas or redeveloped areas for the provision and
installation of utilities such as electricity, supply of water,
drainage, sanitations, refuse collections, schools, clinics
and amenities such as parks and sport grounds;
• Cities should have a reliable inventory of their land;
• Cities should update the value of their land.
 • One of the sub-programs of the Civil Service Reform is the installation of
the Expenditure Management and Control system which cities should
Civil consider;
Service • City administrations should harmonize and implement the expenditure
Reform management and control mechanism, which contains the reform of
accounting, budgeting, procurement, auditing, and internal control
principles in the preparation of the financial improvement plans;
• City administrations should formulate and introduce performance
appraisals and incentive systems in relation to the objectives of the
REPs;
• City administrations should put systems in place to take care of the
quality of local services including the establishment of complaint
handling mechanisms and the participation of citizens in urban affairs;
• City administrations should select and train suitable staff to manage
these plans and their objectives;
• City administrations should include the REP context in a chapter of their
code of conduct to prevent potential corruption.
Tax
❖ • Keeping in mind the national and regional tax
Reform reforms which are currently carried out, city
administrations should consider customizing
and updating their local revenue systems
accordingly. Continued efforts are necessary to
initiate essential changes to local tax tariffs,
charges and fees. The local tax administration
must also be modernized.
 Follow regional and local frameworks
All specific documents to city administrations and the regions
they are located in should be collected carefully, such as:
• Local development plans of city administrations;
• Strategic plans of city administrations;
• Medium-term fiscal planning of city administrations;
• Medium-term development plans of the region;
• Statistical abstracts such as on population growth in the
region and the city (if available);
• Study documents that show the socioeconomic profile of
the city administrations;
• Cadastre plan especially financial cadastre for city
administrations and other related.
 Set up a task force
❖ In order to prepare a REP, city administrations should first
establish an ad-hoc task force.
❖ Revenue enhancement planning needs different experts in
different disciplines, such as economics, finance, taxation and
law.
❖ The technical team should comprise of members from the
different working units of city administrations and members
from revenue administration and city finance offices.
❖ This task force should come together one month before the REP
is due and research the information needed according to this
guide.
❖ So as to gather all relevant information for the REP, the
members of the task force need to cooperate intensively with
different sector offices and woreda officials.
❖ Relevant information on taxpayers and for widening the tax
base should be collected.
❖
 7.3 Analysis Of Past Revenue Performance
❖ The first exercise for developing a revenue enhancement
plan is analyzing past revenue performance.
❖ To do so, a list of all revenue items should be produced and
their past performance assessed. This includes:
(a) Tax revenues from municipal services,
(b) municipal rent revenues and investment incomes,
(c) municipal service charges,
(d) revenues of sales of goods and services and
(e) other capital receipts.
❖The trend analysis provides important inputs for further
planning.
❖It is also the basis for the subsequent gap analysis.
❖Performance changes registered within a time span of
three years are averaged out.
❖In assessing past performance the following factors are
taken into consideration:
✓ Appropriateness of valuation and assessment,
✓ timely billing,
✓ collection efficiency and
✓ enforcement mechanisms.
❖ The city’s administration collection efficiency is reviewed using two
indicators: Actual efficiency and billing efficiency respectively.
❖ The key indicator used for measuring the performance is per capita
revenue collection.
List all revenue items
❖ It is important to analyze the nature and structure of the city
administration’s revenue items before developing strategies to
enhance these.
❖ Therefore all municipal revenue items should be identified & listed.
❖ The completed table will:
a) allow for a detailed overview of all revenue sources, and
b) help to understand the scope of the city administration’s mandate
and the potential revenue base available.
❖ By law, city administrations are empowered to collect and use the
revenue items listed in figure 3.
❖
❖
❖
 Assess past performance of revenue titles
❖ Once all revenue items are listed, a review should be
made of at least the last three years.
❖ Different elements can contribute to the analysis of the
past revenue performance such as the number of payers,
the revenue performance and the percentage of total
revenue generated by this item.
❖ This will show the level of change (increase, decrease, or
stable revenue).
❖ Finally, the average revenue of the past three years should
be calculated.
❖ The factors that determine revenue collection performance
are usually appropriateness of valuation and assessment,
timely billing, collection efficiency and enforcement
mechanisms.
❖ On the other hand, collection performance can be
measured by examining tax assessed, levied, billed and
collected compared to the per capita basis.
❖ A collection efficiency analysis consists of two different
measures:
• Actual collection efficiency that is defined as the
percentage of the total amount planned (billed) against
actual collection; and
• Billing efficiency which is defined as the proportion of
total taxable property assessed against that actually
billed;
 Identify main difficulties in past revenue performance

❖ The major limitations of revenue collection performance

can be explained by enforcement problems, tax payment
procedures and capacity constraints.
❖ Problems such as delays in the legal system, absence of a
tax court, absence of proper billing systems, lack of
transparency and awareness of defaulters are the main
issues that can be mentioned under enforcement
problems.
❖ Besides, shortages of skilled manpower and a lack of staff
training programs, high manpower turnover, absence of
computer assisted taxpayer registration and record keeping
systems are problems that fall under capacity constraints.
Generally, the main difficulties encountered in revenue
performance over the last three years include:
1. Small tax base
2. Poor documentation
3. Incomplete tax coverage
4. Difficulties with tax assessment:
• The assessment procedures are not based on a standard or
objective yardstick
• The system heavily relies on the judgment of tax officers
• Taxpayers are treated inconsistently
• Lack of categorization of taxpayers’ grades
5. Collection inefficiency
6. Problems related to the payment procedure
7. Lack of enforcement mechanisms
8. Weak human resources in tax administration (lack of
institutional capacity and administrative inefficiency)
9. Wrong revenue estimation at the first stage (absence of
proper tax valuation and assessment methodology)
10. Lack of awareness of taxpayers
11. Outdated tariff rates that have served for more than 40
years
12. Lack of service charge rate computation methodology
 7.4 Examination Of Expenditure Management
❖ Align with Expenditure Management and Control Reform
Program
✓ In the context of service delivery, city administrations
should make direct reference to the government’s
‘Expenditure Management and Control Reform Program’.
✓ This program provides meaningful experience and guidance
for the city administration’s expenditure management:
i. City administrations should follow the principle of
Efficiency, Effectiveness and Economy (EEE) when taking
public expenditure decisions;
ii. Procurement of goods and services with public money
should provide benefits proportional to the amount spent
on the goods and services, i.e. value for money;
 iii. City administrations should strive to develop medium-
term fiscal planning that has clearly defined projections
for revenue and expenditure;
iv. City administrations should prepare a strategic plan for 3-5
years.
The annual budget for both capital and recurrent
expenditures should be based on the medium-term fiscal
plan;
This strategic plan has to serve as a guide for resource
allocation, i.e., planning has to be systematically
integrated in resource allocation processes;
v. City administrations should ensure public participation
when preparing strategic plans, approving annual budget
and prioritizing development projects;
vi. City administrations should implement cost centre
budgeting so as to maximize sound financial management
and allow proper information on costs which is used to
determine prices for service delivery to the public;
Vii City administrations should ensure propriety while using
public funds and design a system to avoid misuse of public
funds;
viii. City administrations should regularly close their accounts
and get annual audit reports six months after the end of
every fiscal year.
 Budget wisely
❖Budget-planning integration is one of the most important
aspects of expenditure management.
❖An annual budget of cities should clearly indicate:
• Revenue to be collected for the budget year from each
revenue source;
• Actual revenue and expenditure of the past three years;
• Annual budget divided into capital and operating budget;
• Measurable performance objectives for each revenue
item;
• Particularities of annual investments;
• An estimate of cash flow for the budget year based on
revenue source, broken down at least quarterly.
 Assess expenditures of cities
❖ Expenditures must be analyzed from different Angles.
❖City administrations should:
i. List and analyze items of recurrent and capital expenditures over
the last three years in the budget;
ii. Assess the sources of finance for each type of expenditure. City
administrations collect charges and taxes from service delivery (as
their own source), grants from regional government, loans and
contributions from different sources.
✓ This allocation is not yet being practiced by most city
administrations but should ideally be introduced with the cost
centre approach.
✓ The allocation of expenditures to revenue sources helps to visualize
the extent of the gap.
✓ In the medium-term, recurrent expenditure should be financed
completely by own revenue sources.
✓ In the long-term, the city administration should aim at financing all
regular expenses, including recurrent and capital investments
through own revenue sources;
iii. Assess the capacity of the city to implement the whole budget during
different budget years by comparing the planned expenditures
against actual performance.
✓ This will help to see the capacity and performance level of city
administrations in terms of expenditure;
iv. Calculate the expenditure per capita (for both recurrent and capital
expenditure) of the past three years and compare the results with
another city with a similar sized population and economic base.
✓ This is a simple self-evaluation tool.
✓ City administrations should have access to figures from other cities
in their region.
✓ Other performance data can be requested from the federal
government.
✓ In general, the higher the per capita expenditures are, the better
the service provision as well as city development.
✓ Low per capita expenditures reflects poor service provision;
v. Identify the controllable and uncontrollable costs of the
city in order to help decision makers decide which
controllable costs to cut.
• Controllable costs are costs that can be influenced or
managed, i.e., in this case by the cost centre head.
• Controllable costs are for example staffing,
advertisements and overtime work.
• Uncontrollable costs cannot be influenced by any
individual.
• Some examples include depreciation, rent and all other
fixed costs outside the cost centre’s control.
❖ The financial balance tells you to what extent the revenue will
cover expenditure.
❖ Based on this outcome, city administrations know how much
more revenue they need to generate.
❖ Yet, in a difficult situation, an increase in revenue might just
cover the committed expenditure, and as a result this will
require the elimination of all other uncommitted proposals.
❖ If the budget can still not be balanced, reductions in committed
expenditures have to be made.
❖ The normal approach would be to first look for reductions in
overhead expenditures, and if this is not enough, cuts in
services might have to be considered.
❖ The balance between recurrent and capital outlays is one of the
important areas cities should monitor.
❖ Greater activity devoted to the annual budget and capital
should result in citizens becoming more satisfied.
7.5 Strategies to increase revenue administration efficiency
7.5.1 Broaden tax base
❖ Ethiopia, like most other developing countries, is challenged
with widening its tax base largely because of the high
unemployment rate and the low income levels of its citizens.
❖The tax base refers to the overall value of the economic unit
(including individuals, entreprises, etc.) under tax
considération.
❖This is generally represented by the region’s or city’s GDP. Urban
local governments should consider that the tax base is more of
a concern for macro-economic planners.
❖However, the base does not necessarily refer to the overall
economy but may be a particular sector or taxable group.
❖Increasing the tax base should be directly related to economic
growth measures and pro-economic development strategies.
7.5.2 Increase tax coverage
❖ The coverage ratio measures the extent and number of tax rolls
that exist at a relevant revenue collection office.
❖ In general, a comprehensive list and an efficiently organized
database are essential for optimizing tax collection.
❖ At present, only Addis Ababa and Dire Dawa have introduced
the ‘Standard Integrated Government Tax Administration
System’ (SIGTAS) at city level.
❖ Over the coming years all city administrations should use this
facility. Considering this, city administrations should start to
collect relevant information.
❖ Focus should be put on the following recommendations and
respective concrete measures to be taken.
❖
❖
 7.5.3 Consider tax rate and ratio
❖ The tax ratio is the weighted average of specific tax rates
usually determined by legislative decree.
❖ These rates are rarely changed and are only occasionally
adjusted or reduced to correspond with a change in economic
realities.
❖ The tax authority has a responsibility to monitor the effects of
the rates and the impact the rates have on economic activity.
❖ The authority should advise the legislature on future changes.
❖ Avoidance may exist if a tax rate is too high.
❖ However, valuable fiscal resources might decline if rates are too
low.
❖ Together with the revenue office, a city administration should
closely and regularly monitor the appropriateness of tax rates
taking into account the economic reality.
❖ A simple question can help to evaluate the
appropriateness of the tax rates: Does the planned revenue
cover the planned expenditure?
❖ Municipal tax rates are determined according to the tasks
that city administrations have to fulfill.
❖City administrations should assess the rates or tariffs for
each service at least every two years and contact the regional
BUDC to request a tariff revision whenever necessary.
❖This assessment should include an economic situation
analysis (taking into account the inflation rate, buying power,
etc.) and a survey of taxpayers to measure the taxpayer
capacity.
 7.5.4 Valuate and assess taxes
❖ The valuation ratio identifies the extent to which the
taxable unit has assessed its market value.
❖The valuation ratio is much more sophisticated than the
coverage ratio that seeks to merely identify the taxable
resource.
❖As a result: City administrations must compare on an on-
going basis the economic unit with its market value.
❖This implies that city administrations have a good
estimation of annual expenditure and sales of taxpayers.
❖Data has to be collected on inputs and processing costs
incurred as well as revenue generated by taxpayers.
❖To do this, city administrations should have professionals
who can set mechanisms as to how to assess taxpayers;
❖ City administrations must create a clear procedure and
encouragement for self evaluation, for instance through self
assessment mechanisms, in order to reduce the revenue
office workload and enhance compliance.
❖Currently, only annual income declaration forms exist which
are frequently completed incorrectly.
❖Tax education programs should be implemented to improve
the completion of the income declaration forms.
 7.3 Revenue Enhancement Plan
❖ The international trend towards the decentralization of
functions and responsibilities to LGs continues in most
developing countries, “grudging at times, more forthcoming
at others.
❖To be effective, decentralized functions and responsibilities
should be matched by adequate financial resources at local
level to undertake them.
❖Broadly, this requires both increased fiscal decentralization
and an increase in the generation and management of own
revenues by LGs.
❖ In short, local governments are faced by both an increase in the
number of their service functions and responsibilities, and a
growing population to provide these services to.
❖In this context, the ‘central question’ for effective local public
finance of “. . . how to capture the benefits of urbanization in
order to increase the supply of services” (Bahl and Linn, 1992, P. 1)
becomes a particularly important challenge.
❖If a local government in addition is faced by a contradictory
policy environment and poor performance or a decline in its local
economy, limiting the potential for own revenues, the situation
becomes environment as outlined above and poor performance or
a decline in its local economy, limiting the potential of own
revenues, the situation becomes even more concerning.
❖ In this context, financial improvement planning in local
governments is particularly important.
❖Financial improvement planning is most effective when it forms
part of a wider program of financial management reform and
development.
❖Many LGs, however, arrive at financial improvement planning
more reactively, in some instances in the context of crisis
stabilization.
❖Here, financial improvement planning has two potential
benefits, namely
(i) To remedy an immediate financial failure in a LG (the crisis), &
(ii) To place the LG generally on a more stable financial footing
providing space for more rational long-term financial management
(the stabilization).
❖ Various approaches to financial improvement planning in local
government have been developed.
❖Of particular significance for practitioners is the framework that
is adopted for the financial analysis and particularly for structuring
the package of recommended improvement measures.
❖It is in this framework that the general approach that is to be
followed with regard to revenue-side factors, expenditure-side
issues, the effectiveness of financial systems and other aspects
are established.
❖The framework set out some years ago by McMaster (1991)
remains of particular use.
❖His approach has been extended, however, in the subsequent
applications of financial improvement planning in LGs.
❖ Regarding financial improvement planning, McMaster’s
framework is appealingly logical, suggestion a threefold strategic
focus on:
i. Improved revenue mobilization
ii. Greater expenditure planning
iii. Increasing private (including community) participation in the
provision of urban services.
❖The financial improvement planning work followed a strategic
approach built around four pillars, namely:
i. Improving basic financial management systems and practices
ii. Increasing revenue
iii. Reducing expenditure
iv. Building internal financial management capacity to undertake
reforms.
❖ The essence of the financial improvement planning
recommendations relating to financial management system was
threefold, namely.
i. Rehabilitation of the budget as a financial management tool-
✓ a more accurate and realistic budget would be fundamental to
better financial management, serving to inform financial
management decisions and to track reform progress and general
financial performance over time.
✓ The program of basic action steps focused first on bringing the
budget process timing and format in line with the existing standing
orders.
✓ Second, a zero-based budget exercise was recommended for the
following financial year to bring the budget more in line with reality
and to establish a budget baseline for further financial
management.
✓ Finally, simple three-year projections were recommended to
introduce strategic direction into budget thinking.
ii. Strengthening of financial control systems-
✓The purpose of these measures is to enhance visible
expenditure control in several key areas.
✓ The action program included:
✓elevation of the internal audit function and changes to
reporting relationships,
✓a fast-track process for outstanding audit years and an
emphasis on completing accounts for the most recent
financial year,
✓and several changes in procurement system
arrangements.
iii. Modernization of financial information systems-
❖Many of the LG’s difficulties with financial management related
to the lack of readily accessible and reliable financial
information.
❖The centralized and dated computer system resulted in
significant integrity problems in recording financial outputs.
❖Most of the problems would be readily resolved though the
introduction of an integrated financial information system and
related technology.
❖However, given the poor financial situation of the LG, based on
internal funds alone this would be impossibility.
❖The essence of the action program therefore related to
determining the system needs of the LG and obtaining external
support for obtaining and operationalising an integrated financial
management system.
 7.3.1 Increasing Revenues
The FIP recommendations relating to revenue generation
therefore covered the following:
i. Creating an institutional focus for revenue improvement –
❖creating an overall strategic focus in revenue activities can
be difficult when various components of revenue (database
maintenance, billing systems, collection, legal processing of
defaulters, etc.) are spread across several divisions and
departments.
❖It is recommended that a relevant revenue divisions to
build co-ordination across revenue functions, to introduce
strategic direction and to streamline and ensure rapid support
for revenue improvement measures to be introduced.
ii. Streamlining existing revenue sources-
❖it is probable that many of the smaller revenue sources
cost more to collect than the value of the revenues that they
bring in.
❖A systematic cost of collection versus revenue collected
analysis of the revenue sources of some LGs’ leads to the
recommendation to encourage the LG to focus on major
sources of revenue and to terminate marginal sources.
❖This will allow the LG to focus its human and financial
resources on those revenue sources that have potential to
make a real impact on the financial position.
❖Termination of several minor revenue sources could also
have positive impacts for public perceptions of the LG.
iii. Restoring integrity to the main revenue
databases-
❖ a number of measures were encouraged to
improve the integrity of the databases on which the
main property and employee taxation and fees
systems of the LG are based.
❖This included particular attention to the property
taxation system and the integrity of the property
valuation roll.
❖Measures included improved crosschecking and
the use of alternative information sources to
establish tax liability.
iv. Strengthening debtor management-
❖ the financial analysis of LGs’ had indicated that the arrears
and outstanding debtors’ situation of the LG was poor.
❖This situation had worsened due to the lack of perceived
and effective action against defaulters.
❖Introduction of a more rational and systematic protocol for
arrears and defaulters to be coordinated across several
divisions by the revenue team was recommended.
❖Clear and systematic action against defaulters was
required to restore credibility to the taxation systems.
v. Revision of taxation levels and charges-
❖ further increases to taxation levels were not recommended
given the poor economic conditions prevailing in the developing
countries.
❖However, fees charged for the rental of various council
properties were below market and had not been increased for
several years.
❖Increases to market rates and the use of annual inflation
indexing were recommended.
vi. Disposal of non-core functions and assets-
❖ the disposal of non-core functions and assets, especially the
various commercial ventures of the local governments, were
recommended to provide additional one-off revenues.
❖This should form part of overall improved system of asset
management.
❖ The strategic focus of the revenue recommendations therefore
related primarily to improving the collection of revenues from
the existing revenue base of the local government.
❖A financial consideration related to the increasing gap that had
grown in LGs’ between the collection of revenue and the visible
delivery of quality infrastructure and services by the LGs.
❖ This situation led to increasing reserve and anger of the public
to pay taxes and charges due to the local governments.
❖A recent review of international lessons in property tax reform
strongly emphasizes the importance of media campaigns and the
management of public perceptions when changing taxation
systems (Rosengard, 1998).
❖Revenue potential and visible delivery is very closely linked.
 7.3.2 Reducing Expenditure
❖In the context of reducing revenues, the need to manage and
reduce expenditure becomes critical.
❖So trapped, the expenditure reduction recommendations
focused primarily of cutting expenditure in ‘soft’ areas to create
more financial room for more fundament expenditure reduction
actions.
❖The measures to address expenditure involved
i. Improved cash flow and debt management-
✓ the use of overdraft facilities as a ‘rolling’ borrowing
mechanism at a high interest rate was resulting in significant
additional expenses.
✓ It was recommended to renegotiate the current overdraft into
a loan and introduce stricter controls on the use of overdraft
facilities.
ii. Disposal of non-core functions and commercial ventures-
❖ the financial analysis had indicated that considerable
expenditure was being made on non-core function and
particularly the loss-making commercial ventures in local
governments’.
❖Disposal of these activities has the potential to eliminate
expenditure areas while also may have potential to generate
some revenues through disposal of related assets.
iii. Increased outsourcing –
❖ outsourcing where possible and appropriate of core functions
and services that would remain the responsibility of the LG was
recommended.
❖If conducted effectively, this could increase value for money of
the LGs’ expenditure by introducing innovation and efficiencies.
iv. Reduction of personnel expenditures-
❖ in particular it is necessary for the local governments to get out of
the salary expenditure trap in which they find themselves.
❖To do this it was recommended to review various provisions under the
conditions of service and to undertake a staged and strategic
downsizing of staff.
❖Staff downsizing, primarily thought reduction of expenditure, would
be initially in areas related to non-core functions that are to be
disposed of and functions where outsourcing is possible.
❖In the medium term, further downsizing would be informed by a
more through organizational evaluation exercise.
❖Staff downsizing should be phased to enable the LGs to gradually
increase its financial position to embark on further retrenchment.
❖It was also recommended that proceeds from the disposal of non-core
functions and related assets should be established as a restructuring
fund to cover initial retrenchments until more budget space was cleared
to fund downsizing from operational expenditures.
❖ The essence of the financial improvement planning
recommendations on the expenditure side related to
expenditure reduction in non-core function areas and on
creating financial space to embark on a strategic downsizing
exercise.
❖In many respects, this restructuring of the functional and
personnel size of the LG would make the organization more
consistent in size and function with the reduced
circumstances of the area as a result of economic decline.
❖It would be unrealistic to expect the local government to
continue to operate in the fashion that it had during more
favorable economic times.
 7.3.3 Building Financial Management Capacity
❖ It is important that a LG builds a sustainable foundation of
financial management capacity both of councilors, management
and staff.
❖New skills are also needed for new roles.
❖For example, outsourcing implies a different role for the city
council.
❖Capacity building will be required in setting performance
requirements, contracting out, contract management, and so on.
❖A program of financial management capacity building was
recommended, focusing as much as possible on targeted on-the-
job training, short seminars, workshops and courses.
❖Strategically, the provision of training to a core of financial
management personnel would provide external support and
guidance for the financial improvement planning measures to be
implemented.
End of chapter Seven!
Thank you!