UNCDF- LOCAL REVENUE MOBILIZATION INITIATIVE. Final Report 26 th June 2015 Page 1 of 46 PUNTLAND STATE OF SOMALIA LRMI Frameworks Final Report UN JOINT PROGRAMME ON LOCAL GOVERNANCE AND DECENTRALISED SERVICE DELIVERY (JPLG) IN SOMALIA PUNTLAND STATE OF SOMALIA Local Revenue Mobilization in Somaliland, Puntland and the Federal Government of Somalia (FGS) Local Revenue Mobilization Frameworks Final Report Report By: Kandole B. Patrick [email protected]+256-772-409-113 or +256-752-409-113 26 th June 2015
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UNCDF- LOCAL REVENUE MOBILIZATION INITIATIVE. Final Report 26th
June 2015
Page 1 of 46 PUNTLAND STATE OF SOMALIA LRMI Frameworks Final Report
UN JOINT PROGRAMME ON LOCAL GOVERNANCE
AND DECENTRALISED SERVICE DELIVERY (JPLG)
IN SOMALIA
PUNTLAND STATE OF SOMALIA
Local Revenue Mobilization in Somaliland, Puntland and the Federal
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4. Legal and Policy Framework challenges
(1) All the regions operate a decentralized system of governance which allows a level of
discretion in revenue administration at the local level. The centre provides remittances
under the fiscal decentralization process; these are different for each region.
(2) The amount of funds transferred to LGs by the Centre has no relationship with services
rendered4 except in the case of Counterpart funding for Donor funds. There is also no
linkage to the levels of revenues a LG is able to collect.
(3) There is no discernable trend in the level of grants transferred as this depends on the
level of revenues raised by the centre.
(4) Local tax tariffs are approved by the Ministry of Interior on application by the LG
Councils. The last known approved tariffs are dated 2009 and are extremely out of the
current economic reality. LGs are charging different rates according to their own
assessment and generally not following any nationally set guidelines currently.
(5) Puntland State of Somalia has an on-going review of the legal framework and Tariffs
structure which may be complete by January 2016. This is a costly and skills consuming
exercise which may require support of the UNCDF. It hoped that the other parts of
Somalia will emulate the Legal framework review in Puntland.
(6) There are no specific laws to govern specified revenue sources which create
complications during assessment and payment enforcement.
(7) The legal framework5 lists the revenue categories that may be collected by designated
local governments. The range and powers on revenues to be collected are based on
grading of Local governments; they are divided into four grades, A to D, where “A”
designates the capital of each region with more powers to collect revenues, while districts
are graded from “B” to “D” with a smaller range of taxes assigned to them. LGs in Grade
4 The Somaliland government provides 12.5% of national budget as transfers to LGs while Puntland
provides for 2.5%. Municipalities hosting a sea Port get in addition a direct share of customs duty at 10%
and 2.5% in Somaliland and Puntland respectively 5 Law No.7 issued in 2003 lists all Lag revenues. Law no.3 & 12 Regions and districts administration, and
Puntland Taxation framework 2014
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are more endowed and fund their total budget to more than 70% in most cases, while the
lower grades depend much more on transfers from the centre6.
(8) The existing administrative law provides Local governments with more than Twenty (20)
Own Source Revenues (OSRs), which the mission has for ease of reference divided into
four major categories (1) Livestock based
Taxes (2)Land based taxes (3) User fees and
Charges (4)Business License. A number of
these revenues are not yet implemented by
some LGs due to lack of clarity in the law
which assigns them to levels of government,
the centre and LGs.
(9) There is no coordinated Human resources
policy framework that spells out the
structure, responsibilities and pay structure
for LG staff. Low remuneration is said to be
a disincentive for revenue collectors and consequently a low yield. Low remuneration
may also create temptations for fraud and irregularities. This increased risk call for
urgent formulation of monitoring tools and internal audit manuals and guide.
(10) Lack of clarity in the legal framework in respect to revenue responsibilities,
specifying who sets rates, who collects and who retains which source, and what level of
rates?.
(11) Local revenues such as Property tax, Markets, street parking, agricultural taxes….
do not have enabling laws to guide assessments, valuation and enforcement systems. The
absence of a law on taxation of municipal property has made prosecution of defaulters
more difficult. Neither Garowe nor Gardo for example, has had any significant cases of
prosecution of tax defaulters, despite many default cases, and the case is similar in all
municipalities in Puntland. Obscurity within the law encourages political interference,
opens doors for corrupt tendencies and default with impunity.
6 Overall municipalities in grade “A” contribute more that 70% of total budget from OSRs. Bossaso a larger
percentage in central government grants due to the additional share from the Port Authority. Gardo is a grade C
local government and therefore more dependants on CG grants.
Low remuneration may also
create temptations for fraud
and irregularities. This
increased risk call for urgent
formulation of monitoring tools
and internal audit manuals and
guide.
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(12) The enforcement mechanism of removing or locking main doors without judicial
authority has proved unpopular and besides it has no legal backing.
Conclusion of Legal framework
(1) The absence of a relationship between
transfers and local revenue collection may
be a disincentive, especially where the
transfers are significant as in the case of
Bossaso.
(2) Approved revenue sources that are
approved by Law but not yet implemented
should be collected as soon as practicable.
(3) Tariffs that are out of touch with the economic reality must be reviewed as an
immediate short term action.
(4) A transfer formula should be worked out to have a reference weight to local revenue
mobilized as a percentage of potential revenues.
(5) The LDF should include revenue in the performance criteria and provide incentives.
(6) Low remuneration and skills is having an impact on the morale of revenue monitors
and collectors.
(7) For better implementation, all revenue initiatives must be backed by a specific legal
framework, a law for property tax, Royalties, Business and land….
(8) Collection of revenue arrears is difficult to enforce in the absence of specific legal
framework on Property Taxes and other revenues
5. Enumeration and Registration
This process involves identification and registration of tax objects and individuals in a computer
based medium or hard copies of registers. Registers should show name of tax payer, location,
income liable for taxation, type of tax
For better implementation, all
revenue initiatives must be
backed by a specific legal
framework, a law for property
tax, Royalties, Business and
land….
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(1) Whereas the GIS and business registration have improved on the records, there is still a
challenge in the GIS for property. The records contain some property that is exempt,
however, attempt to isolate this are underway in Puntland.
(2) There is insufficient logistics in terms of transport and stationary and human capital
Conclusion of Enumeration and Registration
(1) GIS should be verified physically with a door to door task force so that the real taxable
property is on the roll.
(2) Train enumerators and data entry clerks
(3) Provide computers and stationary in a timely manner.
6. Assessment and Billing
This process involves determining the taxable income or
wealth income basing on approved transparent criteria or tariff
structure.
(1) The assessment criteria especially for business licenses
and land are still underdeveloped. In Garowe the
process for assessment of trading licenses is not well
refined and is exposed to costly loop holes7. Assessment is based on “value” of goods in
the shop at the time of assessment!
(2) There are no assessment committees which are representative and there is no evidence of
an appeals system except for reference to the Mayors.
(3) The absence of comprehensive street nomenclature has often delayed distribution of bills
and therefore leading to revenue arrears build up.
(4) The levels of poverty, deprivation and unemployment are high in the region and this
creates special problems in bringing a larger population to pay for the cost of service
delivery.
(5) Enforcement of compliance to pay is increasingly difficult because of the socio-political
environment.
7 The highest license id about USD 150 per year and the lowest is USD 30. Assessment is based on value of stock
displayed in shop
There is widespread
inequity and unfairness
in assessment; this
perceived unfairness may
result into quite
resistance to pay.
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(6) A large number of the population are engaged in informal trade, vending water on
donkey drawn trolleys road side Quat kiosks, roadside food stalls… and all these present
a problem in taxation because they are mobile and have no business records that can be
used for tax assessment.
(7) The tax tariff rates are considerably extremely low and out of step with the economic
reality. In Garowe, Property transfer tax of 2% is based on cost value rather than the
market value. Land premium for new plots of land is an average shs 1000-20008 as a one
off payment.
(8) Inappropriate valuation and assessments methods especially for land based taxation.
There is widespread inequity and unfairness in assessment, for example, a plot of land in
Garowe which measures 40metres by 60 metres is levied shs 140,000 irrespective of
location, gifted property is exempt from transfer tax, and residential property is rated at
shs 80 while commercial property is rated at shs 140 per square meter irrespective of
location. This perceived unfairness may result into quite refusal to pay.
(9) The GIS shows property but in a majority of cases has not been able to classify exempt
and non-exempt property and this could have the effect of indicating higher revenue
potential than would be the case if there was valuation on only taxable property.9
Conclusion on Assessment and billing
Unstructured assessment systems may result into low capture of tax objects and lower than
expected revenue volumes. The absence of an appeals tribunal may create challenges for fairness
and transparency in assessments which may result into tax payer apathy and resistance
7. Sensitization, Customer Care and Publicity
This involves activities that lead to tax payer buy-in, acceptance to pay and hence reduction of
resistance to pay with an overall result of reduced administration costs. Specific activities
include holding sensitization workshops and seminars for revenue collectors. Taxpayer
awareness campaigns on the importance of tax payments. Outputs may be radio programs, talk
shows, drama.
8 USD=20,000 shs
9 This matter was brought to the attention of HABITAT during discussions and there is a review that will take care
of this challenge.
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(1) This generally is not done on a comprehensive and structured basis although some
municipalities such as Gardo, Garowe have increased publicity using bill boards and
radio programmes and drama.
(2) There is no structured mechanism for publication of where resources come from and
where they go. However, Hergeisa intends to start a magazine and newspaper to inform
residents about resource use and encourage revenues payments.
Conclusions on Sensitization, Publicity and Customer Relations
Arising from the observations above, the following conclusions which will in turn inform the
development of the R-MAP and LRMP have been adduced;
(1) More action to improve on tax payer convenience so they don’t travel long distances in
order to pay taxes
(2) Introduce direct payments to the bank
(3) The mayor may be overwhelmed with complaints from defaulters. Therefore it may be
effective to establish a mechanism for receiving and handling public complaints
(4) Creation of a one stop centre or a complaints box will go a long way to reduce
congestion at the Mayors’ and Executive Secretaries’ Offices
(5) Develop a communication strategy championed by the MoIF
(6) Holding regular consultative meetings may reduce taxpayer apathy and collection costs
8. OSR Collection Performance and Monitoring
Collection involves activities involved in receiving revenues from taxpayer with a focus on
systems and procedures for ensuring adequate security and controls form any fraud. Monitoring
on the other hand involves activities, procedures, processes and methods used to ensure that local
government have enough revenues to finance their commitments. A process that involves
ensuring that bills are correct, issued to the right persons, collected and accounted for.
(1) Business and property Revenue is gaining significance especially due to the actions of
ILO and HABITAT respectively.
(2) Municipalities such as Bossaso have a large percentage of the budget funded by direct
sharing of customs revenues10
including a share of export taxes for livestock from these
ports. Bossaso receives 2.5% of customs duty on livestock. This may become a
disincentive to evolve new revenues in the long run.
10
The share is paid to the municipalities after every two days.
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(3) There has been significant growth in revenues especially in cases where there has been a
change in the tariff rates and better billing system, a case for Gardo and Garowe in
Puntland.
(4) Local revenue contribution to total budget is significant in municipalities averaging over
70%. Different revenue categories have varied significance between the regions.
Diagram 1: Revenue Category contribution in total OSRs 2014 shows the
significance of different revenue sources in the total budget, a reflection of
opportunities and endowment.
(5) Some tax payers evade taxes because they are not sensitized on the importance of paying
taxes. There is minimal involvement of political leaders in promoting revenues especially
property and business revenues.
(6) Low staff capacity in terms of skills and tools and low pay for revenue collectors
(7) Low logistics in terms of transport and data management. Computers are in short supply.
(8) There is no well facilitated monitoring function.
(9) Insufficient compliance audit of revenue by either the MoIF or the Auditor General.
Source: Consultant Analysis of Secondary Data: Respective LGs
0%
10%
20%
30%
40%
50%
60%
Livestock taxes Land based taxes
User Fees and Charges
Business Licenses
Garowe 10% 52% 23% 16%
Gardo 22% 25% 30% 23%
Galkacyo 32% 16% 11% 41%
A%
SH
AR
E
Diag. 1: Revenue Category contribution in total OSRs 2014 -PUNTLAND
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(10) The diagrams shows that Business and Land Taxes contribute on average is 60%
of the total Own Sourced Revenues (OSRs). The significance of the sources appears to
be on tax objects that are difficult to hide and more related to immediate earning of
income especially for animals in the market and immovable property. The local
governments also indicated that their major revenue sensitization focused on wealth in
terms of animals, land and buildings. Whereas there appears an opportunity to raise more
revenues from land taxes in the urban areas, there is still a state of low business activity
especially in lower grade local
governments and
impoverishment11
.
(11) Monitoring and
involvement of internal audit is
weak and this may be the
underlying cause of low
collection returns in many cases.
(12) OSRs growth trends varied widely from 244% for land based taxes to 7% for
commercial licenses, averaging at 51% overall growth between 2013 and 2014.
Diagrams 2: OSRs Growth Rates 2013-2014, shows how each category faired in target
local governments.
11
A quick survey within the Gardo and Garowe shows many old structures and a generally impoverished resident
population. The mission visited markets and witnessed a very low tempo of business activity. The urban areas in
Puntland show severe signs of deprivation and rundown buildings.
Monitoring and involvement of
internal audit is weak and this may
be the underlying cause of low
collection returns in many cases.
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Source: Consultant Analysis of LG Secondary Data
Diagram 3: Relative Importance of OSRs in Total Budgets 2014, below gives a graphic
representation of the relative importance of OSRs within the total budget.
(11) Increased revenues leading to improved delivery of basic services
(12) Greater transparency of revenue administration and local governance in general
(13) Institutional and regulatory reforms
(14) Establish clear links between the revenues raised to service improvements
The R-MAP brings out the specific activities that will deliver the intended outcomes as
envisaged in the Local Revenue Mobilization Initiatives Framework proposal within the short,
medium and long term periods. Increased revenues will spinoff in increased public investments
creating more resident satisfaction which then implies more willingness to pay taxes. The activity
that will break the vicious cycle of inadequate revenues is increased investment now. Therefore
without external financing, the initial stages must involve both compulsion and persuasion.
Increased revenues will spinoff
in increased public investments
creating more resident
satisfaction which then implies
more willingness to pay taxes
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19. R-MAP Sample format- collection and monitoring
Strategy and actions during planning periods
Increase Collection efficiency and effectiveness
Activity Short term [ 0-6 months] Medium [6-12 months term] Long term [12-24 months]
Legal and policy framework
Enforcement guidelines Communicate the enforceable legal codes Incentive schemes
Early warning system for defaulters Take legal actions
Consistent enforcement
Revision of tariffs
Socio-economic analysis of revised tariffs Review all tariffs Hold public discussions and workshops
Publish tariff rates Popularize tariffs
Information brochures
Monitoring systems
Setting monthly revenue targets Monitoring and analysis of monthly revenues Discussion of reports with council committees Revenue targets Internal audit manuals and guide
Design revenue monitoring forms Early warning system for defaulters Collection enforcement guidelines Publish tariff rates
Information brochures Hold public discussions Follow arrears Popularize tariffs
Reporting and Publicity
Sensitization and Improving taxpayer relationships and customer service Develop internal audit manuals and guides Participatory budget conferences Regular reporting Provided registers for each revenue source Convenience in paying
Train staff in revenue records management Provide for computerized receipts Provision of required computers Link BIMS to AIMS-collection and billing Regular Internal audit reports
Publication of financial and service information and programs Conduct public accountability surveys and meetings Upgrade recording and monitoring software
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20. Going Forward-Next steps Basing on consultations during the mission and findings during the workshops, the following
next step actions will be critical to the overall success of the next phases of the LRMI
Sn Activity/ processes Est. Time Who?
1 Translation of LRMI manuals and guides into
Somali language
July/August
2015
UNCDF
2 Develop accountability and Internal Audit Manual July/August
2015
UNCDF
Roll out of training to municipalities and districts Oct/Nov
2015
UNCDF
Complete the Municipal Finance Policy July 2015 HABITAT
3 Review tariffs and implement quick wins Oct. 2015 MoI/LGs
4 Implement new revenues identified- low hanging
fruits[ street parking]
Oct. 2015 MoI/LGs
5 Training and Skilling Internal Audit and Oversight Sept 2015 UNCDF
6 Develop and implement LED strategies Set 2015 ILO/LGs
9 Selection of a revenue steering committee at each
municipality
Nov 2015 MoI/LGs
10 Complete Review of policy and legal framework Dec 2015 UNCDF/LGs/MoI
11 Support and coaching champions for LRMP Jan 2016 UNCDF
12 Support Development of LRMP/R-MAP Jan 2016 UNCDF
13 Review and draft resource specific legal framework May 2016 MoI
14 Review organization service structure May 2016 UNCDF/MoI
15 Develop Human resources policy June 2016 ILO/MoI
16 Budget and cost rationalization, cost centre
budgeting
Sept 2016 UNCDF
17 Communication strategy Oct 2016 HABITAT
18 Develop PPP strategy Feb 2017 ILO/MoI
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21. Conclusion
The overall goal of the revenue mobilization initiative is to have an increase in revenues from all
regions of Somalia so that the quality of governance and service delivery is enhanced.
A Revenue Improvement Plan [RIP] serves as a crucial tool
for the successful management of LG revenues. Ensuring a
sound local revenue mobilization system is an essential
ingredient in actualizing fiscal decentralization. Successful
revenue mobilization creates the effect and the potential to
foster political and administrative accountability by
empowering communities and sustaining peace.
For any futuristic local government, the attraction of
exploiting to the full potential revenues and the effective
accountability of the same are paramount and key success factors. A comprehensive Revenue
Mobilization Action Plan will address how the challenges earlier identified will be managed to
result into increased revenues.
It is further hoped that action and implementation of the proposed measures will enhance local
revenues in the target local governments by more than 90% of the potential initially and
eventually 100%. With a long coastline, mineral wealth, animals, tourism attractions, LGs in
Somalia have substantial potential for enhancing local revenues especially from business
licenses, user charges and property rates.
Revenue Mobilization is quite difficult and cumbersome without computer assisted
methodologies especially in valuation billing and reporting. Therefore, the issue of automating
the revenue mobilization process should be given preferential attention by all LGs
Finally, in construction of LRMPs one of the key assumptions is that the people and governance
of target local governments are able and willing to make the necessary effort to increase the
revenue levels, and to undertake all administrative measures within an appropriate time
framework. And that the local governments will have a professional, well empowered and liable
administration with improved financial capacity.
Revenue Mobilization is
quite difficult and
cumbersome without
computer assisted
methodologies especially
in valuation billing and
reporting
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22. Appendix 1: Document Review
1. UN-JPLG LRMIP for Somalia framework proposal draft 2014
2. Puntland, State of Somalia Constitution
3. Puntland Law No 12: Investigation and suppression of financial violations
4. Municipal Finance and Public service delivery in Puntland, UN Habitat, Puntland
5. Puntland Taxation Framework 2014, MoF, Puntland State of Somalia
6. MoU: Local Development Fund for Puntland and UNCDF
7. LRMIP for Puntland, outline proposal
8. Revenue Assessment Report, Puntland, Ministry of Interior and Finance
9. Puntland Business License Tariffs, 2010, Ministry of Interior
10. Puntland: Facts and Figures
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