67928



Public Finance Review:
Benishangul-Gumuz Regional State
(Final Draft)




Chekol Kidane (PhD) and Getnet Alemu (PhD)
May 2010
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Table of Contents
I. Introduction................................................................................................................... 11
    1.1 Background........................................................................................................... 11
    1.2 Why PFR study in Ethiopia................................................................................. 14
    1.3 Objective of the Study ......................................................................................... 15
    1.4 Methodological issues......................................................................................... 16
    1.5 Limitation of the study ......................................................................................... 17
    1.6 Organization of the Report ................................................................................. 17
II. Socio-Economic Profile of the Region .................................................................... 17
    2.1. Administrative structure and political profile ................................................... 17
    2.2. Economic profile ................................................................................................. 18
    2.3. Social profile ........................................................................................................ 20
    2.4. Infrastructure profile ........................................................................................... 21
    2.5. Poverty Profile ..................................................................................................... 21
III. Overview of Fiscal Decentralisation....................................................................... 23
    3.1 Legal and policy framework for fiscal decentralization in Ethiopia............... 23
      3.1.1 Legal framework
      3.1.2 Policy framework
  3.2 Expenditure and revenue assignments and gap financing ........................... 26
  3.3 Fiscal decentralization in practice ..................................................................... 29
IV Planning and Budgeting Process............................................................................ 30
  4.1. Planning process ................................................................................................ 30
      4.1.1. Strategic plan preparation
   4.2 Budget process .................................................................................................... 32
      4.2.1 Formulation, consolidation and Recommendation of Budget
      4.2.2 Legislative Approval and Appropriation of the Budget
      4.2.3 Budget Implementation and monitoring
      4.2.4 Developments and trends in block grants
  4.3 Oversight and Reporting..................................................................................... 35
V Assessment of Local Revenue Generation ............................................................ 36
  5.1. Legal framework ................................................................................................. 36
  5.2. Institutional set up and capacity of the regional revenue authority............. 37
  5.3 Revenue generation potential of the region..................................................... 38
  5.4 Trends in revenue generation and structure ................................................... 38
  5.5 Revenue in sample woredas.............................................................................. 42


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      5.5.1 Bambasi Woreda
      5.5.2 Assosa woreda
VI. Overview of Regional Expenditure and Financing .............................................. 44
  6.1. Financing envelop............................................................................................... 44
  6.2 Budget utilisation.................................................................................................. 46
  6.3. Regional spending by function ......................................................................... 49
  6.4 Regional spending by sector.............................................................................. 52
  Source: BG BoFED and MoFED.............................................................................. 54
  6.5 Pro-poor / policy based spending...................................................................... 56
VII. All woreda level spending ...................................................................................... 57
  7.1 Woreda spending by function ............................................................................ 57
  7.2 Woreda spending by sector ............................................................................... 60
VIII. Overview of Sample Woreda Spending.............................................................. 62
  8.1 Financing envelope ............................................................................................. 62
  8.2 Sample woreda spending ................................................................................... 63
IX. Aid Utilisation............................................................................................................. 66
X. Progress in Meeting Regional Service Delivery Targets..................................... 67
  10.1 Education ............................................................................................................ 68
  10.2 Health .................................................................................................................. 71
  10.3 Water ................................................................................................................... 73
  10.4 Road .................................................................................................................... 74
  10.5 Agriculture........................................................................................................... 75
XI. Lessons and Challenges ......................................................................................... 75
References ...................................................................................................................... 81




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List of Acronyms
ABE          Alternative Basic Education
ADB          African Development Bank
ADLI         Agricultural Development Lead Industrialization
BG           Benishangul Gumuz
BoE          Bureau of Education
BoFED        Bureau of Finance and Economic Development
CBDSD        Capacity Building for Decentralized Service Delivery
CSA          Central Statistical Agency
DFID         Department for International Development
DLDP         District Level Decentralization Program
EFY          Ethiopian Fiscal Year
ESDP         Education Sector Development program
FDRE         Federal Democratic Republic of Ethiopia
FDREPCC Federal Democratic Republic of Ethiopia Population and Census
             Commission
FMOH         Federal Ministry of Health
FTC          Farmers Training Centre
HEW          Health Extension Worker
HEP          Health Extension Program
HP           Health Post
HSDP         Health Sector Development Program
HIV/AIDS     Human Immunodeficiency Virus/Acquired Immunodeficiency
             Syndrome
m.a.s.l.     Meters above Sea Level
MoFED        Ministry of Finance and Economic Development
MoCB         Ministry of Capacity Building
NCBC         National capacity Development
NGO          Non-government Organization
PASDEP       Plan for Accelerated and Sustainable Development to end Poverty
PRSP         Poverty Reduction Strategy Program
PSCAP        Public Sector Capacity Building Program
SDPRP        Sustainable Development and Poverty Reduction Program
SNNPR        Southern Nations, Nationalities and Peoples Region




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Executive Summary
1. The objective of this study is to explore in depth public finance issues and
their impact on decentralized service delivery at the regional and woreda levels in
Benishangul Gumuz (BG) region. The study is carried out as part of the federal
and some regional case studies designed to examine effectiveness of public
finances of sub-national governments. This study was expected to (i) review the
institutional arrangement for managing public finances at the regional level
including policies, budgetary institutions, systems and processes; (ii) assess the
level, trend, and composition of public spending (both functional and economic
classification) in per capita terms over the past five years and identify key
achievements and limitations; (iii) assess the level, trend, and, composition of
revenue at the regional level and examine the financing framework, including
ways to increase local revenue generation capacity; (iv) assess the role of
external aid in supporting decentralized service delivery and the sustainability of
the program in absence of external aid; (v) review the planning and budgeting
process as well as the quality of PFM system; and (vi) data permitting, establish
the link between the level of spending and the outputs and outcomes for selected
sectors.
2. The study used standard public financial process review methodologies used
for undertaking PFM assessments. The report reviewed the various studies,
plans and performance reports of the various sectors in the regions between
1997 and 2001. In addition, key informant interviews were carried out at bureaus
levels and woreda offices of education, health, water, agriculture and rural
development, finance and economic development, revenue, General Auditor,
rural road and woreda administrations. Two woredas were selected in
consultation with BoFED, Bambasi and Assosa woredas. Finally, the review
accessed and analyzed both Woreda and BoFED budget and expenditure. The
main findings and recommendations of this report is presented as follows.

Findings
Planning and Budgeting Process:
3. The strategic plan of the region (1998-2002) has not been fully costed. The
targets and strategies of most of the sectors therefore remain too ambitious as
the costs of delivering them were not known from the outset and backed up the
regional fiscal space. The strategic plan and the annual planning process are not
linked to the budget. This has resulted in narrow fiscal spaces with adverse
implication on development plans. Kebele and village plans feed in to woreda
plan and regional plan is prepared based on sectors’ plan and woredas’ input.
Some sector offices at woreda and region level are complaining about the unfair
allocation of the available resources among sectors during the budget process.
4. There are two important lessons that have emerged from the experiences of
planning. First, there is better alignment of national and regional plan in health
and education sectors, mainly due to the fact that these sectors have been
implementing sector-wide approaches. Their achievement in realizing their


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regional targets and by so doing contributing to meeting MDGs targets seem also
better in these sectors. This is missing in the other sectors. Secondly, plan
preparations are largely informed by needs rather than available resources. The
actual resource materialized during the four year period (1998 – 2001) of the
regional strategic plan (1998-2002) was only 60 percent of what was needed
during the same period.
5. The regional and Woreda level budgets are approved as late as the end of
the first quarter leaving nine months for actual implementation, though sectors
and woredas do spend recurrent budget as per the previous year’s budget. There
is no evidence that this process is supported by a cascaded down and
interrelated budget calendar. One would say the budget calendar is not observed
at regional and woreda levels.
Local Revenue
6. The region has increased its revenue collection from year to year. Similar
trends have been seen at the woreda level. The regional revenue grew from 27.1
million Birr in 1997 to 50.7 million Birr in 2001. The structure of revenue in the
region is dominated by tax revenue which accounts, on average, for 70% in the
last five years. Woredas do not have the authority to set taxes and generate
additional revenue. It is up to the regional state in consultation with federal state
to revise tax rate and up to the regional state to bring in some economic activities
in to the tax system.
7. The region managed to cover about 12.4% of its spending from own source.
The per capita own revenue in BG region has increased from Birr 46 in 1997 to
Birr 77 in 2001; this is about 6.6 times lower than the national average (507 birr
in 2001). The main reasons for this low own revenue is low business profit tax,
low capacity and low tax rate for the main tax base in the region: agricultural
income tax. Agricultural income tax and land use fees are simply based on land
size irrespective of the amount each producer earn and fertility of the land each
producer farm. The revenue collected from businesses is not growing as
expected. There is no data base for tax payers and their numbers are not well
known. It is also difficult to ascertain that the tax being paid is as per the incomes
generated. With this taxation framework the potential of the region to expand its
revenue base is limited as it should depend on very small and less complaint
business tax. This is further exacerbated by the weak capacity of the revenue
office at regional and woreda levels.

Spending
8. In nominal terms, aggregate regional spending doubled from about 192.7
million in 1997 to about 335.1 million Birr in 2001, showing an annual average
increment of 15%. In per capita terms, the same trend is observed as it increased
from Birr 324 to Birr 511. This figure is consistently lower than the countrywide
average except for the year 1998. Comparing with the per capita revenue that
the region generates per capita spending is much higher. While in 1997 per



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capita revenue is 14.1% of per capita spending, it has increased to 15.1% in
2001.
9. Of the total spending, the share of capital spending, on average, has
remained less than 25% but with drastic fall in 2001 to 14.8%. The decline is
worse at woreda level. The share of capital spending is reduced as low as 3% in
2001. Most of the resources were spent on financing the increasing recurrent
expenses. The share of operational expenditures from the total recurrent
expenditure is declining both at regional and woreda level from 56% in 1997 to
47% in 2001 at regional bureau level and from 26% to 15% at woreda level for
the same period. The ability of higher level management to make supervision
and provide support to lower levels of service providers is constrained by the
declining share of operating expenses.
10. Share of all Woreda spending from overall regional spending increased from
46% in 1997 to 52% in 2001, while woreda share of capital spending from overall
regional capital spending decreased from 26% to 11%. The increase comes
totally from the recurrent spending.
11. In terms of spending priorities, about 60% of the resources were spent in the
five priority sectors at regional level and 70% at woreda level. In per capita terms
total poverty spending has increased from 183 Birr in 1997 to 294 Birr in 2001.
The same trend was observed in terms of per capita recurrent expenditure. Per
capita capital spending has, however, declined since 1999. When BG is
compared with countrywide figure, total and capital poverty sectors per capita
spending at national level is always above the BG average. Recurrent poverty
sectors per capita spending in BG is larger than the national average. This
implies that regions are assigned progressively to manage more recurrent
expenditure than that of capital nature.

12. Education stands out clear as a number one priority with its share, on
average about 28% for the last five years from overall regional spending. Health
and agriculture are the distant second and third preferred sectors in the region.
At woreda level the share of education from overall woreda spending was, on
average, about 40% for the last five years. Agriculture and natural resources is
the distant second preferred sector by regional bureau and woreda level
expenditure. The third preferred sector is health. Water and road sectors are the
most least preferred sectors within the priority sectors at regional and woreda
level. This neglect is reflected in terms of poor performance of water and road
plan.

Budget Utilization
13. The budget outturn in BG region has consistently declined since 1998. What
is achieved in 2001 is the lowest in the last five years. The major driving force of
this poor utilisation is capital budget. The capital budget out turn has consistently
and drastically deteriorated; it has declined from 94.9% in 1998 to 56.9% in 2001.
This is a discouraging trend particularly when compared with the national
average. While budget utilisation at countrywide level is on improvement that of


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BG region is on decline. Comparison of actual expenditure against plan shows
strong recurrent performance. The performance of capital spending, in addition to
being weak, has been declining over the years. The weak capital outturn is
mainly due weak outturn in loan and assistance.

Aid Utilization
14. The outturn in aid is even worse. Aid utilisation is below 50%. The total
amount of loan and assistance budgeted for the five year period (1997-2001) by
the region was Birr 125 million, out of which only 52.76 million Birr (42%) was
disbursed. There is huge Aid data discrepancy between that of BoFEd and
MOFED.

Recent progress in improving service delivery targets
15. Since the launching of PASDEP in 2005/06, the region has put effort to
progress on the MDG targets and reports from the administration shows notable
progress in human development and infrastructure. In education, the efforts
made over the last five years have increased numbers of pupils at the primary
level in a manner that has been unprecedented before. Between 1997 and 2001,
GER in primary (regular) decreased from 107% in 1997 to 96% in 2001. The
pattern is observed in net enrolment for primary education. It has declined from
84% to 74% for the same period. This should be a serious concern for the region.
The possible reason for this could be the rapid expansion of ABE and parents
want also to keep their kids close to where they live.
16. Despite this decline, the Gender Disparity Index (GDI) for GER and NER is on
decline; more girls are enrolled but still GDI for BG is consistently below the
national average.
17. The GER for first cycle secondary education of BG region is consistently
higher than the national average and the gap, on average is increasing. In this
regard the achievement of BG is commendable. The GDI is, however, below the
national average for the period under consideration. What is encouraging is that
the region is trying to narrow the gap.
18. The availability of qualified teachers both at primary and secondary is at
stake. In the second cycle of primary school and secondary school the
percentage of qualified teachers is 63% and 22.5% respectively.
19. The region reached clean drinking water coverage of only 51.3% in rural
areas and 84.6% in urban areas in 2001 against the target 74% in rural areas
and 90.1% in urban areas. The main reasons for not being able to achieve the
target are: lack of adequate budget, shortage of human resource, low capacity of
contractors, shortage of vehicles, and low infrastructure.
20. The region has shown modest and gradual improvements on health
coverage. Health coverage has improved from 56% in 1997 to 72% in 2001.
However, the region still faces shortage of health personnel. Of the required 1st
grade (PHCU) health personnel, only 62.5% are available. In addition, at Woreda
health offices only 13% of the required professionals are available.
21. The road density in km per 1000km2, 15.5km in 1997, is planned to increase
to 36.2km by the end of the five year period, i.e., in 2002. This target will not be



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achieved as the current trend in budget allocation is to be continued. The
regional Road Authority, for instance, had planned to buy 16 road construction
equipments in the five year plan period but it was able to buy only one due to
budget constraint.

Recommendations
22. This report has contained a number of recommendations, including the
following:

   a) Policy making and planning should be resource constrained rather than
      driven by demands from sectors and community, which in the end
      frustrates not only the implementing offices but also the community as
      much of the plan remains unimplemented. In this regard, it is therefore
      necessary to institute mechanism by which:
      • The regional strategic plans are costed and cost implications of targets
           and strategies fully known;
      • The regional plan at all levels are driven by mapping of available
           resources from all sources;
      • Channel II and channel III resources are declared by participating
           agencies before the onset of the planning process;
      • This could be facilitated if BoFED considers introducing a three year
           rolling Medium Term Expenditure and Fiscal Framework (MTEFF); and
      • Develop, implement and adhere to a budget calendar at all levels of
           government.
   b) There is a variation among the sectors when it comes to obtaining results
      and having coherent and integrated plan. In this context it is necessary to
      initiate a sector wide program in other key sectors but more importantly in
      agriculture and rural development through conducting a jointl assessment
      with development partners and develop a common plan to ensure its
      coordinated development. Strengthen the water sector plans by learning
      from the experiences of the health and education sector planning
      processes.
   c) The existence of comprehensive region and woreda wide planning system
      is imperative for priority setting and efficient resource utilisation. It is
      therefore necessary to integrate special purpose grant programs with the
      regional plann. This could be facilitated more if there is a move towards
      developing a regional MTEFF.
   d) Strengthening the revenue collection is something that should be given
      due attention and priority. The options for expanding the revenue base
      should be explored. There is a need to implement revenue capacity
      strengthening programs (skills up-grading, ensuring protection and
      security, rewarding employees for better performance) at regional and
      woreda level similar to that of federal level. The tax harmonization
      exercise between the federal and regional levels needs to be supported by
      harmonization of management including incentives.



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   e) Develop systematic and regular recording and valuation mechanisms for
      community contribution and all other off budget sources, notably NGOs.
   f) Monitoring and evaluation is focused on input and output indicators.
      Evaluating achievements in outcome indicators against plan after
      completion of five year plans, in addition to providing important lessons,
      could be an important input to the next five year plan and could serve as a
      basis for policy review.



I. Introduction
23. There has been a growing interest in public expenditure issues among
governments, development agencies and the wider public. Countries with similar
incomes and growth over the past three decades have seen significantly different
impacts on poverty (DFID, 2001). The question of how the size of overall public
expenditure or public investment affects growth or poverty has been an ongoing
issue. The lack of research-based studies comparing the effect of different types
of public expenditure has prompted international donors and governments of
developing countries to equate pro-poor spending with social sector investment
(Paternostro et al, 2005). Previous studies in other countries on the relative
contributions of public investment in different sectors have yielded mixed findings
(Tewodaj et al, 2007). In the absence of empirical evidence supporting
development-returns to public spending, considerations other than economic
development may fill the vacuum created by this knowledge gap.
24. On the part of development agencies, the growing interest in Public Finance
Review (PFR) also stems from recognizing that there is little point in focusing
only on aid outcomes, while the wider environment for public finance
administration and service delivery remains week.
25. Public expenditure analysis is a method of analyzing how governments
allocate and manage their financial resources (World Bank, 2009). The purpose
of doing the analysis is to provide recommendations on how governments can
manage public finances more efficiently and effectively in the future. Insights
gained in PFRs can inform strategic planning and budget preparation to identify
ways to improve strategic allocation and value for money.


1.1 Background
26. Efficiency and effectiveness of public expenditure on the one hand and its
linkage with growth and equity on the other has been an issue that many
countries including Ethiopia have been grappling with. This is compounded by
the fact that public spending decisions are increasingly being made at
decentralized levels. Establishing empirical evidence on the link between
expenditure, growth and equity and how decentralization would affect the
interaction of these variables has been part of the development debate for some


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time. Providing answers to this question, according to Fozzard (2001) is a basic
‘budgeting problem’. The main questions and concerns raised about the
efficiency and effectiveness of public expenditure include but not limited to:

    •      How effective is public expenditure in stimulating growth? If it is positive,
           is its effect transitory or dynamic?
    •      Which composition of public expenditure allocation is best to impact more
           on growth, poverty reduction or both?
    •      What is the effect of growing public expenditure financed through deficit
           financing from domestic sources on macro-economic stability and hence
           growth?
    •      Is there a trade-off in choosing pro-growth and pro-poor allocation of
           public expenditure, and if yes how big is this trade-off? What is the right
           balance in resource allocation among competing sectors for sustained
           high level growth that have a direct impact on reducing poverty? The list
           can go on.
27. The analysis made linking public expenditure to growth used either Solow-
Swan (1956) growth accounting model or the endogenous growth models
developed by Barro (1990), King and Robelo (1990) and Barro and Salnai-i-
Martin (1992,1995). Both models show that public expenditure affect growth but
differ on the significance of its effect. The growth accounting models argued that
the effect of public expenditure remains transitory as the long term growth path is
determined by the exogenous factors of population growth and the rate of
technical progress. For the endogenous model on the other hand public
expenditure may change the growth path, by affecting the production factors
and/or Total Factor Productivity (see Blanca Moreno-Dodson, 2008). The
empirical evidences however remain inconclusive for a number of reasons:

   (i)       All public spending might not be actually used as per budget allocation
             and any leakage will affect its impact on growth;
   (ii)      Efficiency constraints in the government system affect the share of
             public spending used for creating new capital (labour and capital
             stock);
   (iii)     Not only the level of public expenditures but the way government
             finances its spending affects its impact on growth. For instance,
             inflationary financing and distortionary taxes that crowd out private
             investment might have negative effect on growth; and
   (iv)      Problems of data disaggregation of spending into public expenditure
             that are ‘productive’ and those with negligible growth impact will not
             allow for identifying the right balance in inter-sectoral public sector
             allocation.
28. The other aspect of this debate is the link between public spending and
equity, or pro-poor allocation. Unlike the tax policy, where a theory of optimal
taxation was developed, there is no comparable theory in optimal allocation of



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expenditures to various sectors. Most of the tools and guidelines used are
pragmatic adaptations of current knowledge (Stefano Paternostro et al, 2005:5).
Public spending allocation decisions primarily target interventions that address
market failures and inefficiencies.
29. Some argued that as a result of heavy NGO advocacy, who equated poverty
reduction with social spending, and the effort of donors to limit the influence of
political elite on spending allocation decisions towards their needs, there seems
a consensus that social sector spending is the key to poverty reduction. Hence,
most of the resources generated from the external aid have been allocated for
social sectors. For example, of the total resource flows to HIPC countries, 49%
were allocated for education and health. Since then, academic studies are using
spending on education and health as a proxy to pro-poor spending. There are
concerns about such narrow definition of pro-poor spending. World Bank’s
Operational Evaluation Department on HIPC (2005) study on review of enhanced
HIPC initiative (2005) recommends that there should be a different balance
between social sector spending and other sector, specially, infrastructure and
rural development for mobilizing investment to promote growth, a necessary
condition for poverty reduction. Killick (2004) utilized the OED’s findings to argue
forcefully that large amounts of aid are being misdirected, promoting a narrow
approach to poverty where spending in the social sectors is expanded at the
expense of broader developmental priorities such as raising economic growth
and addressing structural weaknesses, both of which are key to sustained
poverty reduction.1
30. The other strand of argument is the link between efficiency of public spending
and fiscal decentralization. Public spending through fiscal decentralization, is
believed to bring about an efficient resource allocation through a responsive and
accountable government by bringing the revenue and expenditure assignment at
lower level of governments, an equitable provision of public services to residents
of the country through fiscal transfer from the higher level of government to lower
level of government, and preservation of macroeconomic stability and economic
growth. By dint of this fact, it has become an important policy agenda in many
developing economies in general and transitional economies in particular.
31. Fiscal decentralization by bringing fiscal power to local government with
decentralized governance believed to facilitate and fasten the development effort.
The fiscal power assigned to local government should in principle enable them to
generate sufficient revenue in order to discharge their functions and provide the
services for which they are assigned to do so. There are two basic reasons for
this argument:

(i)        Local governments spend more wisely and are more accountable for
           money they are responsible for raising, and
(ii)       People also are more willing to pay local taxes because they can make
           the link between service delivery and their money.

1
    Ibid, page 3.


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32. It should be noted, however, that lower level of governments are usually given
the slowest growing revenue sources, which fail to keep pace with expenditure
growth. This exposes them to huge vertical fiscal imbalance as most regions in
Ethiopia are currently facing.


1.2 Why PFR study in Ethiopia
33. The government is investing public resources on social and economic
infrastructure (education, health, water, roads, power, communication, etc) in
order to provide basic services and to create an enabling environment for the
private sector to invest. This is specifically so at the sub-national governments in
Ethiopia where they are increasingly being responsible for delivering majority of
the basic services to the people. However, not enough is known about the state
of their public finance at all levels of the government structure and this is
particularly so at sub national levels. Between 2002/03 and 2008/09gc, out of the
annual average general government expenditure of ETB 34.5 billion, nearly ETB
14.9 billion (i.e., 43 percent of the total) was spent by regional and woreda
governments. The latter’s share in total expenditure on basic services was even
higher, i.e., sub-national governments spent nearly 48 percent of all government
expenditure in pro-poor sectors know as education, health, agriculture, water and
roads. Clearly the efficiency and equity of public spending have a significant
impact on sustainable growth and poverty reduction. Yet, while the public finance
of the federal government is carefully scrutinized, there is little systematic
analysis of the public finances at sub-national level.
34. Eventhough there is a large body of work on decentralized service delivery in
Ethiopia, their focus have been largely on institutional development and not on
the effectiveness of public expenditure. These institutional reviews have been
part of a monitoring instrument of ongoing projects with limited scope for linking
inputs to outcomes. The PFR study as a whole therefore is a response to
undertake an integrated analysis of institutional transformation and fiscal policy
effectiveness. To this effect, the PFR-2010gc could serve as a stepping stone to
undertake more in-depth studies on the efficiency of public spending at the
sectoral level. Specifically, PFR-2010 will examine the following three broad
issues:
   •   Changing institutional context. The changing decentralization
       landscape and continued support of institutional reform and capacity
       building warrant an in-depth study in public service delivery progress and
       challenges. The report will therefore document changes in the institutional
       context and set-up through which decentralized service delivery is taking
       place in Ethiopia.
   •   Allocation of expenditure. The Government of Ethiopia spends nearly
       six-tenth of its budget on pro-poor sectors, a third of which is financed
       from external sources. Both the federal government and donor partners


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        are concerned about two emerging trends in sub-national finances. First,
        the share of pro-poor sectors spending in sub-national budgets is
        declining. Second, the imbalance between recurrent and capital as well as
        between wage and operating spending is growing at the sub-national
        level. What is the source of these growing pressures on sub-national
        budget and how to protect expenditure allocated to basic services are the
        two questions that this review would need to answer. Further, the role of
        donor partners, the predictability of aid flows and its implication on
        absorption, and allocative efficiency of resource at the woreda level are
        also crucial for the sustainability of Ethiopia’s externally supported
        decentralized service delivery.
   •    Cross-regional and cross-woreda learning. A vast amount of data has
        been collected through Woreda Benchmarking Survey, which provides a
        rich source of information to examine the performance of woredas on
        fiscal inputs and outputs as well as on outcomes on the ground. Such an
        analysis will help to identify the ‘high performing’ regions and woredas and
        indentify the factors that lead to their success. This can result in significant
        cross-regional and cross-woreda learning—currently missing in public
        policy and discourse—as well as help the federal government to come up
        with schemes to scale-up good practices from high performing woredas to
        the rest of the country.


1.3 Objective of the Study
35. This BG region Report is part of the PFR-2010 analysis. The objective of this
regional study is to deepen our understanding of public finance issues and their
impact on decentralized service delivery at the regional and woreda levels. This
will be one of the first studies to examine effectiveness of public finances of sub-
national governments in a systematic manner. The report is one of the four
regional PFR reports designed to inform the overall PFR report. Specifically,
each of the case studies will examine the following issues for each of the specific
regions:
   a)    Review the institutional arrangement for managing public finances at the
         regional level including policies, budgetary institutions, systems and
         processes.
   b)    Assess the level, trend, and composition of public spending (both
         functional and economic classification) in per capita terms over the past
         five years and identify the key achievements and limitations. As part of
         this exercise, also examine the sources of the recent decline in spending
         on basic services (education, health, agriculture and roads).
   c)    Assess the level, trend, and, composition of revenue at the regional level
         over the past five years and examine the financing framework, including
         ways to increase local revenue generation capacity, (own revenue by
         sources, Federal block grant and SPGs, and off budget sources such as
         from NGOs and the community).



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   d)       Assess the role of external aid in supporting decentralized service
            delivery and the sustainability of the program in absence of external aid.
   e)       Review the planning and budgeting process as well as the quality of
            PFM system.
   f)       Data permitting, establish the link between the level of spending and the
            outputs and outcomes for selected sectors (e.g., education and health).


36. The outputs of the regional PFR study are, therefore, the following.
        •    the collection and processing of the necessary quantitative information
             on expenditure, revenue and financing (from all sources) and on
             selected development output and outcome indicators (used for the
             determination of woreda block grant) at an acceptable level of
             disaggregation;
        •    the documentation of qualitative information required to understand the
             policy and institutional environment for the delivering of public service
             based on secondary information and through discussion with the
             relevant regional and woreda offices;
        •    the documentation of the perception whether regional public
             expenditure pattern is policy based and the perception of the regional
             officials on the inclusiveness of the so-called ‘pro-poor sectors’; and
        •    the contextualization of the relevance of public expenditure on poverty
             reduction and growth.


1.4 Methodological issues
37. The study used standard public financial process review formats and
procedures. In particular, it heavily borrowed the methodologies used for
undertaking PEFA assessments to inform the process and the type of data to be
collected. The study used a number of mechanisms to collect information for
analysis:
   a) Document review: the report reviewed the various studies, plans and
      performance reports of the various sectors in the regions between 1997
      and 2001. The review team had access to five year assessment reports
      from some sector bureaus.
   b) Key informant interviews at regional and purposely selected woreda
      levels: interviews were carried out at bureaus levels and woreda offices.
      The sector managers interviewed include education, health, water,
      agriculture and rural development, finance and economic development,
      revenue, General Auditor, rural road and woreda administrations (see
      annex 1 for the interview list). Two woredas were selected in consultation
      with BoFED, Bambasi and Assosa woredas.
   c) Analysis of budget allocation and expenditure trends: the review had also
      access to both woreda and BoFED budget and expenditure data and
      analysis is made on the trend and the share of pro-poor sectors.


                                                                                   16
1.5 Limitation of the study
38. The study covered only two woredas as it could not cover more Woredas,
because of time and budget constraints. The selection of Woredas was made
more on purposive and on logistical grounds and the emerging findings from
sample Woredas will not represent all woredas in the region.
39. Obtaining comprehensive regional and woreda budget and expenditure
remains a challenge as there is no system put in place to track in a consistent
manner resources used from off-budget support, community contribution and
sometimes from extra-budgetary resources. As a result, the information
presented in this report mainly relies on resources that are on-budget.


1.6 Organization of the Report
40. Chapter two presents the socio-economic profile of the region Chapter three
outlines the legal and policy frameworks for decentralization in Ethiopia with its
concurrent revenue and expenditure assignment responsibilities among the
different tiers of government. Chapter four presents the overall planning and
budgeting process in the region supported by evidences from the sample
woredas. Chapter five analyzes the local revenue generation in terms of its trend
and structure both at the regional and overall woredas levels as well as the
challenges that the region is facing in raising local revenue. In chapter six, the
overview of regional expenditure and financing encompassing of the resource
envelope, spending by functions, by sub functions, by economic classifications
and sector priorities will be presented. Chapter seven and eight presents the
woreda level expenditures by all woredas and sample woredas respectively.
Chapter nine presents stylized facts on aid utilization and while chapter ten deals
with trends of service delivery outcomes resulting from these expenditures.
Finally, the last chapter concludes with the lessons learnt.




II. Socio-Economic Profile of the Region

2.1. Administrative structure and political profile
41. The BG Regional State is one of the nine regional states of the Federal
Democratic Republic of Ethiopia. It is bounded in the North and North-East by
Amhara region; in the East by Oromia Region; in the South by Gambella Region;
and in the West by the Sudan. The total land area of the region is 50380 square
kilometers. Administratively the region is divided into three zones, 20 woredas
and special woreda, and 472 kebeles. The Abay river divides the region into two:


                                                                                17
the Northern part comprising Metekel zone and Pawi Woreda with a land area of
26560 square kilometers and the Southern part which comprises Assosa zone,
Komashi zone and Mao Como Woreda with a land area of 23820 square
kilometers - A new road joining the two parts is currently under construction.
42. The population of the region in 2001 is estimated to be 711702; of which 50.7
percent were male while 49.3 percent were female. The indigenous2 nationalities
of the Region are Berta, Gumuz, Shinasha, Mao and Como (Revised constitution
of the BG regional state, 1995). There are large numbers of non-indigenous
nationals in the region.
43. The four main political parties of the region (Ethiopian Berta Peoples
Democratic Organization, Gumuz Peoples Democratic Organization, Boro-
Shinasha Peoples Democratic Movement and Mao Como Peoples Democratic
Organization) together have formed the Benshangul-Gumuz Peoples Unity
Democratic party and is the ruling party of the region.
44. The altitude of the region varies from 580 - 2730 m.a.s.l. The highest place of
the region is known as the Beleya plateau and is found in Dangur Woreda; and
the lowest places are found around the source of the Abay river. The altitude of
about 75 percent of the region is classified lowland (Kola) with below 1500
m.a.s.l; 24 percent Weinadega (1500 – 2300 m.a.s.l) and 1 percent as high land
(above 2300m.a.s.l.). Rainfall is uni-modal and occurs for 6 or 7 months between
April to October. The annual rainfall amount is estimated to be over 1000mm.
45. The region is endowed with large water resource potential, both surface and
ground water. It is located on the Abay and Baro-Akobo basins and there are
several big potential rivers that drain into either of the two basins. These rivers
could be used for small, medium, and large scale irrigation. There are 28 rivers
that could be used to irrigate 1687 hectares of land on small scale basis. Among
the rivers that could be used for medium and large scale irrigation are: Beles
163200 hectares; Dabus 51000 hectares; Gilgel Beles 88 hectares Selga 360
hectares. In total 169912 hectares of land could be irrigated (BOFED, 2008)
46. Arranged and early marriage is a norm in the region (especially in Gumuz,
Berta, Mao and Como), with brides as young as 13 years of age. In addition,
religious and customary practices prevent women from petitioning for divorce,
despite their formal legal rights to do so. Abduction is also common practice
amongst Gumuz, Shinasha, and Mao ethnic groups.

2.2. Economic profile
47. Rain fed subsistence agriculture is the main livelihood for more than 92
percent of the region’s population. The indigenous community of the region use
shifting field cultivation and use hoe based farming. Only 44.5 percent of the
farmers use animal power for traction. Unlike other parts of the country, rainfall is


2
 Berta 26.7%, Gumuz 23.4%, Amhara 22.2%, Oromo 12.8%, Shinasha 7%, Mao 0.6%, Komo 0.02% and
others 7.1%


                                                                                        18
not a major limiting factor for agricultural production in the region, except very
few marginal areas bordering the Sudan (BG, BoFED, 2008)
48. Typical characteristics of the shifting cultivation are irregular plots, far from
the village, cultivated for one or two years and then left fallow for more than 5
years. Initially trees and shrubs are cut or burn to prepare the farm plots. Among
most of the settlers, traditional mixed farming is dominant.
49. Cereals are the major crops grown in the region followed by oil crops and
pulse. The average productivity of maize and sorghum is 12 and 9 quintals per
hectare, respectively, while that of finger millet and sesame are 5 and 3 quintals
respectively (BG, BoFED, 2008). Of the total cultivated land, sorghum, maize,
finger millet, sesame and neuge cover 25.3%, 20.34 %, 13.49 %, 12.22 %, and
9.9 % respectively.
50. The region has a high potential for growing fruit crops and coffee. Mango is
one of the most important fruit crops grown, especially in Assosa zone. In
general, the region has suitable climate and soil for growing different variety of
crops both under rain fed and irrigation.
51. Despite the regions high potential for small, medium and large-scale
irrigation, only little (0.7 percent of the cultivated land) has been developed with
traditional irrigation. Two small scale irrigation projects are under construction
through the Regional Water Resource Bureau with a capacity to irrigate 180 ha
of land (Metekel and Assosa zones) and some small-scale traditional irrigation is
practiced on 387 ha of land by the farmers themselves (BG, BoFED, 2008).
52. The percentage of rural households of the region owning livestock is the
lowest (only 37.8 percent of rural households own cattle) in the country. In
2004/05, more than 68 percent of the rural households in the country owned
cattle; the highest being Dire Dawa (74.3 percent) and Afar (73.6 percent)
(MoFED, 2008). Livestock holding in the region is related to ethnic groups. A
large number of livestock is owned by the settlers (Oromo, Amhara and others)
while the indigenous tribes, particularly Gumuz and to some extent Berta, does
not keep as many livestock as the others, except for chicken and goat.
53. Historically, the indigenous ethnic groups used to own large number of
livestock of different types. However, due to the prevalence of Trypanasomiasis
in the lowland areas, the number of livestock population is highly reduced. At
present, they own few numbers of cattle only either for consumption or sale.
Cows are not at all milked and their milk products are rarely used. However, the
indigenous people are well known for their goats, raised both for consumption
and sale. Animal disease and poor management are among the main constraints
of livestock development in the region.
54. Poultry is kept almost by all ethnic groups, including settlers for egg
production as well as for additional source of income. The region has also high
potential for honey production.




                                                                                  19
2.3. Social profile
55. Health coverage, defined as the number of persons within 10 kms of a health
station or higher level facility, was 56 percent in 1997 and improved to 72
percent in 2001(BG, BoFED, 2008).
56. Malaria, intestinal parasites, skin disease, and diarrhea are among the top 10
causes of morbidity in the region. Malaria is the highest in terms of morbidity and
mortality. Estimates show that malaria accounts for one-third of deaths in the
region.
57. The regional under-five mortality rate is 197.7 /per thousand while the
national level is 187.8. The region’s maternal mortality rate is 760/100000 while
the national level is 560-850/100000. Life expectancy for the region is 45 years
and the national one is 47 (FMoH, 2000)
58. HIV/AIDS is also a major health problem of the region. The prevalence of
HIV in the region in 2000 was estimated at 1.8 percent (1.5% for male and 2.2 for
female) (FMoH, 2000), and there were around 9928 people (of which 4439 are
male and 5489 are female) living with HIV/AIDS. The number of AIDS orphans in
the region was estimated to be 1677. At national level HIV prevalence in the
same year was estimated at 2.1 percent and the number of people living with
HIV/AIDS was around 1345970, while the national figure for AIDS orphan was
around 262677 (FMoH, 2000).
59. Only 51.32 percent of rural households and 84.64 percent of urban
households of the region are estimated to have access to potable water in 2001.
Rivers and unprotected springs are the main sources of drinking water for a
significant number of the population. In general, the population is highly exposed
to communicable water born diseases. The major constraints in this sector are
low level of technical and financial capacity, and poor infrastructure.
60. Access to education by the indigenous nationalities is low. Making the
school conducive for learning by fulfilling facilities such as toilets, playing fields,
libraries and water is a task to be accomplished.
61. Gender gaps in the social indicators are among the most sever in the
country, and health indicators reflect poor nutritional and reproductive
environment. It is estimated that 65% of those involved in traditional gold
extraction in the region are women; however, it is their husbands and fathers who
acquire and control the use of their earnings (BG, BoFED, 2008).
62. There are more impediments to girls’ school attendance with each year of
age. In the daily social economic life of the Gumuz, roles and responsibilities are
mainly based on gender division of labor. However, in the shifting cultivation
activities, both women and men participate with specialized and overlapping
roles. Apart from handling the usual family chores, women do all the gathering
tasks of forest food and most of the dry season fishing activity. Hunting and
honey collection is mainly the domain of men (Woldeselassie, 2000).




                                                                                    20
2.4. Infrastructure profile
63. Road is one of the critical constraints to development in the region. The
potential for development is hampered by the poor infrastructure. The region has
very few roads and most of them are inaccessible during the rainy season.
According to interview with a representative of the Rural Road Authority, out of
the 20 Woredas only one – Belojegonfoy - has all weather roads.
64. The road density at national level is estimated to be 32 km per 100km2 while
the road density of BG is 15.6 per 100km2. The region is bisected by the Abay
(Nile) river, over which there is no bridge (although it is currently under
construction) linking Assosa, the regional capital, with Metekel zone.
65. In addition to lack of financial resources, lack of enough contractors, low
capacity of the rural roads authority (both human and material) low participation
of the community has been identified as the main problems of the sector.
66. Improving the road infrastructure of the region and the capacity of the
regional sector responsible for road construction could make significant
contribution to social and economic development of the region.


2.5. Poverty Profile
67. The prevalence of poverty in the region is among the highest. The proportion
of poor people (poverty head count index) in the region is estimated to be 44.5%
in 2004/05gc while poverty at national level was 38.7% (MoFED, 2008:37). While
the national poverty head count index reduced from 45.5 in 1996/97 to 38.75 in
2004/05 (by 6.8%), the improvement in BG is only marginal from 46.8% to 44.5%
(see Figure 2.1). The prevalence of poverty in BG is always more than the
national average except the urban poverty in 1999/00 (see Figure 2.2). The trend
in poverty reduction is very slow in BG relative to the national average. The major
driving force for this poor improvement is urban poverty. Urban poverty increased
in 2004/05 after showing a significant reduction in 1999/00, while rural poverty
reduced significantly in 2004/05 after a significant increase in 1999/00. The
region needs to do more in urban poverty while keeping the momentum in the
reduction of rural poverty.

Figure 2.1: Trends in poverty headcount indices (in %)




                                                                                21
Source: MoFED 2008: Page 37: Table 6.2

Figure 2.2: BG poverty status relative to the national index (figure below zero
shows high poverty status of the BG region)




Source: Figure 2.1

68. Childhood malnutrition in the region seems to be among the highest in the
country. The percentage of stunted children for Ethiopia in 2004gc was 46.9%
while this was 47 for BG region (MoFED, 2008:25-26).




                                                                            22
III. Overview of Fiscal Decentralisation
3.1 Legal and policy framework for fiscal decentralization in Ethiopia

3.1.1 LEGAL FRAMEWORK
69. The Transitional Government of Ethiopia, soon after assuming power,
restructured the political and administrative contour of the country based on its
Charter. This was the first legal framework for federalism. Series of
proclamations (Proclamation No. 7/1992, 33/1992, and 41/1993) were also
issued to strengthen the legal framework for administrative and fiscal
decentralization. Proclamation No. 7/1992 identified the four sources of income
for both federal and regional governments: revenue collected from taxes
allocated to them, fiscal subsidy from federal to regional government, domestic
borrowing, and other sources of income. The structure of political, administrative,
and fiscal decentralization was finally sketched in the Constitution of the Federal
Democratic Republic of Ethiopia, which was ratified on 8th December 1994 and
became effective in August 1995 (Proclamation No. 1/1995).
70. It is this Constitution that gave the principal base for the fiscal
decentralization process in the country. Article 5, 52, 94, 95, 96, 97, and 98 of the
Constitution clarify the responsibility/duty of federal government and regional
states and also provided expenditure and revenue assignments to federal
government and regional states.
71. Following the Constitution, all regional states promulgated their own
Constitution. Although the federal and regional constitutions provided fiscal
decentralization, which constitutes the first generation of decentralization,
originally it was weak in implementation and did not translate into practice up to
woreda level governments. In cognizant of this, the federal government wanted
to push further the fiscal decentralization to woreda governments. Subsequently,
regional governments revised their constitution since 2001 and paved the way for
the second generation of fiscal decentralization - devolution of regional fiscal
power to woreda administration3. The revised constitutions of the regional states
clearly define the structure and power of the regional and woreda administrations
and provided revenue assignment to region and woreda administrations (Art. 47,
59, 84, 85, and 87 of the revised BG Constitution, Proc. No. 31/2002). Woreda
administrations are provided with the right and power necessary to draw up and
determine plan of economic development and social services and implement
policies, laws, regulations and directives issued by the regional state within its
own administration. Regional constitutions also provided woreda administrations
with revenue assignment in order to enable them to discharge their
responsibilities. The same power was provided to major urban centers that do
not lie within the jurisdictional responsibilities of rural woredas.



3
    The lowest administrative echelon with fiscal power.


                                                                                  23
3.1.2 POLICY FRAMEW ORK

i) SDPRP/PASDEP
72. Ethiopia’s development policies and strategies are geared towards poverty
eradication (MOFED, 2006). The Plan for Accelerated and Sustained
Development to End Poverty (PASDEP) is the country’s guiding strategic
framework which is considered as a national plan for guiding all development
activities for the five-year period 2005/06-2009/10. It outlines the major programs
and policies in each of the major sectors, also incorporates national sector wide
plans for education (ESDP III) and health (HSDP III).
73. The PASDEP is the second phase of the Poverty Reduction Strategy
Program (PRSP) process which was begun under the Sustainable Development
and Poverty Reduction Program (SDPRP), which covered a three year period
from 2002/03-2004/05. The main objectives of the five year development plan
are “to lay out the directions for accelerated, sustained, and people-centered
economic development as well as to pave the groundwork for the attainment of
the MDGs by 2015� (MOFED, 2006: page 44). The plan aims to build on the
development strategies pursued under SDPRP (expanding education,
strengthening health service provision, fighting HIV/AIDS, food security program,
capacity building as well as decentralization). The plan also follows on the
Agricultural Development Led Industrialization (ADLI) strategy, with further
emphasis on the private initiative of farmers, diversification and
commercialization of agriculture. Decentralization and capacity building were
among the major pillars of the SDPRP (see MoFED, 2002). For further
strengthening of the fiscal decentralization, the MoFED has issued a Fiscal
Decentralization Strategy in 2004 (MoFED, 2004) which updated the federal-
regional and regional-woreda fiscal framework (regional block and woreda block
grants).
74. In the same fashion, with even much stronger emphasis at local
government, PASDEP recognized decentralization as central to the country's
strategy for ending poverty and providing effective service delivery. The
PASDEP, in addition to consolidating the SDPRP gains, it further envisages
deepening the second generation of decentralization, strengthening the Woreda
administrations in every aspect to enable them to manage and deliver local
services. The plan was to complete the revenue and expenditure assignments of
woredas in the country by 2006-07 (See MoFED, 2006: Section 5.6.3).


ii) Capacity building strategy and programs
75. Most regional states and almost all woreda administrations faced critical
challenges in discharging their fiscal assignemtns (expnediture and revenue). As
a result, the government has introduced a multifaceted effort to strengthen the
capacities of public organizations at regional and lower levels of government.
These include developing National Capacity Building Strategy (NCBS), Capacity
Building for Decentralized Service Delivery (CBDSD) and Public Sector Capacity


                                                                                24
Building Program (PSCAP), among others. PSCAP was envisaged to resolve the
nation-wide prevalence of capacity problems in the public sector, and to that end
was designed in an integrated manner through the involvement of relevant
federal and regional institutions, donor communities, and consultants.4 District
Level Decentralization Program (DLDP) was one of the NCBP’s sub-programs5,
which is directly concerned with promoting the stability, efficiency, and
accountability of Ethiopia’s public sector.


iii) Local government policy framework
76. The MoCB has prepared a “Local Government Policy Framework� document
in 2006. The document addresses quite a number of important issues and
clarifies legal matters, which were at odds until this time. The document clearly
elaborates the structure, composition, powers and functions of local governments
(expenditure and revenue assignments) at different tiers of government;
intergovernmental relationships; human resources administration and planning
and execution responsibilities of local governments, excluding municipalities and
town administrations that are to be guided by the urban development policy and
associated proclamations.
77. The legal policy framework of the region emanates from the revised
constitution of the region (proc. No 31/2002). Principles and objectives of the
regional state policy are clearly articulated in chapter eleven of the revised
constitution. The political, economic, social, cultural and environmental objectives
are stated in Articles 109, 110, 111, 112, 113, and 114 of the revised constitution.
The following are among the ten economic objectives listed under article 111:


      •    Ensuring that all residents of the state get equal opportunities to improve
           their economic conditions and to promote equitable distribution of wealth
           among them
      •    Protect and promote health, welfare and living standards of the working
           population of the state
      •    Carry out an accelerated, integrated and market-led economy focusing on
           the comparative advantage of the Region’s geography, such as the huge
           and fertile land, sufficient rain and abundant and huge tributaries. Lead the
           investors and the development forces of the government in a coordinated
           manner; encourage the movement of capital and labor; and cooperate

4
    The federal government has also established the Ministry of Capacity Building (MoCB) in 2001 to
    coordinate different capacity building subprograms. Capacity building bureaus were also set in regions
    and woredas to facilitate capacity building efforts at regions and woreda levels.
5
    The NCBP’s identified by the government were in fact fourteen, out of which five sub-programs (Civil
    Service Reform, District Level Decentralization, Urban Management, Justice Systems Reform, and
    Information and Communications Technology sub-programs) have been selected for immediate
    interventions to be financed mainly through a large pools of funds known as Capacity Building for
    Decentralized Service Delivery (CBDSD) and Public Sector Capacity Building Program (PSCAP).


                                                                                                       25
      with the Federal Government in laying down the infrastructure linking up
      the Region with the market centers of the Country
.

3.2 Expenditure and revenue assignments and gap financing
78. Fiscal decentralization is a system in which different tiers of government are
assigned with expenditure discretion (expenditure assignment), revenue raising
powers (revenue assignment), and as well a system that defines the nature of
intergovernmental transfer and borrowing. The overriding frameworks for
determining the expenditure, revenue and gap financing assignments among
different tiers of the government in Ethiopia are the Constitutions of the federal
and regional states.
79. Expenditure assignment refers to the responsibilities of a given level of
government in the production and delivery of services. The powers and functions
of regional states are provided by the federal Constitution. Art. 52 of the
Constitution states that regional states are responsible to formulate and execute
economic, social and development policies, strategies and plans of their area; to
administer land and other natural resources in accordance with federal laws; to
prepare and administer their budget; and to establish and administer a state
police force, and to maintain public order and peace within their area. In general
regional states are responsible for all duties that are not given expressly to the
federal government alone, or concurrently to the federal government and the
regional states (for federal government responsibility see Art. 51 of the FDRE’s
Constitution). In the same fashion regional Constitutions also provided
expenditure assignments to the regional states which are more or less the same
with that of Federal Constitution (see for instance, BG revised Constitution Art.
47, 49, 58, Proc. No. 31/2002).
80. The powers and functions of woreda administrations are provided by the
regional Constitutions. The BG Regional State revised Constitution (Art. 85, 87,
92), for instance, provides powers to woreda administration to exercise self
administration; prepare, approve and implement woreda budget; prepare,
approve and implement economic development, social service and administrative
plans; and safeguard peace and security of the inhabitants of the woreda. It
should be noted, however, that there are cases where functions that would
normally fall within the scope of woredas may be undertaken by regional states
on the grounds of economy of scale and/or high costs. This can also happen if a
woreda administration delegates regional state to take care of its own specific
functions beyond its capacity or for other risky circumstances (see MoCB, 2006).
81. In order to discharge the expenditure assignments, each level of government
need to have a revenue assignment. Revenue assignment refers to power of a
given level of government in generating and collecting revenues and using it
within its administrative areas. Decentralization of revenue generating power to
local governments serves several purposes. From the view point of democratic
governance, for example, the very rational for assigning revenue or taxing power



                                                                               26
to local governments is to help voters hold their elected officials more
accountable (Bahl, 1999 and Cochrane, 1983). Adequate revenue assignment
along with the expenditure assignment is believed to facilitate and fasten the
development effort at lower level of government. The revenue assignment to
regional states and woreda administration should enable them to generate
sufficient revenue in order to discharge their functions and provide the services
for which they are assigned. It is argued that revenue assignments or the
division of financial resources between the various levels of government should
ideally be guided by the division of functions/expenditure assignments among
those levels of government (Georgia State University, 2003). There are two basic
reasons for this argument. First, lower level governments spend more wisely and
are more accountable for money they are responsible to raise. Second, people
also are more willing to pay taxes because they can make the link between
service delivery and their money. Bringing governance with fiscal power
(expenditure and revenue assignment) closer to lower level of government is
therefore one of the kernel point of fiscal decentralization.
82. In supporting this, Dillinger et al (2003:234) argued that if lower level of
governments’ expenditure assignments are mainly covered by transfers from the
central government, they would ‘overspend, expecting to get more resources
from the common pool of national resources with the subsequent adverse impact
on macro-fiscal management.
83. The revenue assignments to federal government, regional states and woreda
administrations are legally provided by the federal and regional states
Constitutions. Art. 96 of the FDRE’s Constitution provides federal government the
power to levy/determine/fix and collect custom duties taxes and other charges on
imports and exports; income tax on employees of the federal government and
international organizations; income, profit, sales and excise taxes on enterprises
owned by the federal government; taxes on the income of air, rail and sea
transport services; taxes on income of houses and properties owned by the
federal government; fees and charges relating to licenses issued and services
rendered by organs of the federal government; taxes on monopolies; federal
stamp duties; and taxes on the income and winnings of national lotteries and
other games of chance.
84. The other aspect of fiscal decentralization is the provision of
intergovernmental transfer and borrowing for financing the gap between
expenditure and revenue assignments. Intergovernmental transfer is another
source of financing lower level of government activities. The federal government
provides grants to regional states for reasons of equity as well as to avoid fiscal
stress of regional states because of relatively high expenditure needs and/or
relatively low taxable resources. Grants are of two types: 1) Unconditional grant –
this is general purpose or block grants aimed at financing the gaps. 2)
Conditional grant- in this type, grants carry conditions regarding the use of the
funds. The conditionality refers to earmarking by the federal government to
finance certain services such as uniformity of education, primary health services,
water supply, agricultural extension, roads, etc. (Georgia State University, 2003 ).


                                                                                 27
Likewise regional states provide grants to woreda and urban administrations for
reasons of equity as well as to avoid fiscal stress of woreda administrations.
Grants are also of two types: unconditional and conditional. In Ethiopia grants
from treasury, be it for regional states or for woreda administrations, are block or
unconditional while some grants from external loan and assistance are
conditional grants.
85. The federal government has been giving fiscal subsidy to regional states
since 1995 based on a grant formula - a formula characterized by frequent
revisions. It has, for example, been revised five times (in 1996/97, 1997/98,
2000/01, and 2003/04, and 2006/07). The number of variables used in the
formula ranges from 3 to 5 and the weight attached to these variables has
undergone high variations. Initially, the weight for population was, for instance,
just 30%. It soon changed to 33.3% and enjoyed a significant increase in the
subsequent changes to 60%, 55%, and 65%. Given the high magnitude of
federal grant to regional states (about 85% of total regional expenditures), the
changes in the number of variables and the frequent variation in the weight
attached to them is believed to have adverse effects on regional planning and
budgeting.
86. Furthermore, the variability and less weight attached to revenue collection
effort is also believed to have a disincentive effect on revenue raising effort. In
addition, the use of actual than potential revenue which militates against strong
revenue effort by the regions is one of the weakness of the formulas. As argued
by Molla (2004) and World Bank (2000), the formula through its insignificant
reward for tax effort is assumed to have a disincentive effect for tax collection.
87. The new formula approved on May 18, 2007 (effective as of 2007/08 fiscal
year) tries to address some of the problems associated with the previous formula
based on the following principles: (i) every Ethiopian living in any part of the
country is entitled to a similar range of and level of public service; (ii) grant given
to regions is independent of their tax effort or expenditure level (effort neutral);
and (iii) regions forced to spend more than the ‘standard expenditure’ are entitled
to budgetary support to finance the gap. While the first principle seems to
address the equity issue, the second principle has an important efficiency
implication. Variables included in the formula are population, difference in relative
revenue raising capacities, difference in their relative expenditure needs, and
performance incentive. The approach thus strives for equal per capita distribution
of grant, while considering the needs or capacities of regions.
88. The transfer made by regional states to woreda administration is also guided
by a block grant allocation formula. The recent formula has two components:
recurrent and capital budget. While the recurrent budget serves to estimate and
capture the spending requirement needed to properly discharge recurrent




                                                                                    28
expenditure responsibilities6; capital budget is estimated based upon inter-
Woreda comparisons of infrastructure deficits.7
89. In addition to intergovernmental transfer, borrowing is also the other aspect
of fiscal decentralization in financing the gap. The Constitution confers regional
governments the right to borrow from domestic source. Regional constitutions
also allow Woreda to borrow, but require the approval of the regional
governments.

3.3 Fiscal decentralization in practice
90. The revenue assignment provided to federal government, regional states and
woreda administration in Ethiopia is characterized by a fiscal decentralization that
does not bring spending and tax decisions closer. The fiscal relationship between
federal and regional government is characterized by two factors: considerable
vertical and horizontal fiscal imbalance. Vertical fiscal imbalance is explained by
the revenue assignment. While buoyant and major tax base are assigned to
federal government, relatively few and less buoyant tax base are assigned to
regional governments. The degree of this fiscal imbalance also varies from
region to region and this disparity is known as horizontal fiscal imbalance. There
are various factors for horizontal fiscal imbalance or variation in vertical fiscal
imbalance across regions. As regions are delineated by ethnic and language
factors, they have huge variation in terms of area, population, economic base,
and revenue potential and efforts. Variation in population ranges from 0.18
million of Harari regional state to 27 million of Oromia regional state; variation in
area ranges from 0.34 thousand km2 of Harari regional state to 354 thousand
km2 of Oromia regional state; and variation in number of zonal administration
ranges from 4 in Gambela regional state to 20 in Oromia regional state. There is
also skewed distribution of social and economic infrastructure and huge disparity
in the capacity of regional states in budgetary management and effective
collection of taxes from the existing tax base among the regional states. This has
undoubtedly facilitated the horizontal and vertical fiscal imbalance and for huge
fiscal transfer.
91. These differences, coupled with the mismatch between revenue and
expenditure assignments, dictate the fiscal relationship between the federal
government and regional states and regional states and woreda administration to
be characterized by vertical and horizontal fiscal imbalances8. While most
expenditure is assigned to regional states, the revenue assignment tends to favor
federal government by centralizing the major and most buoyant tax bases. Thus,

6
  The budget is estimated by using the unit costs for the five sectors: education, health, agriculture and rural
development, water, and administrations and general services that represent the rest.
7
  Woredas with relatively less infrastructure receive greater amounts of financial resources based upon the
specific types and relative amounts of infrastructure deficits.
8
  While the expenditure-decentralization ratio (regional expenditure relative to countrywide expenditure),
on average, is 37%, the revenue-decentralization ratio (regional revenue relative to countrywide revenue)
was only 21% for the period 1996/97 to 2006/07. In other words it is only 36.4% of the regional
expenditures that was covered by locally generated regional revenues. The balance is covered by federal
fiscal transfer


                                                                                                            29
there is a clear limitation of revenue assignment to regional governments relative
to the size of expenditure they are assigned. Table 3.1 discloses the extent the
fiscal imbalance in BG regional states and also the sample woredas in the
region.

Table 3.1: Trends in own revenue share from total expenditure/budget (in %)
                     2004/05 2005/06 2006/07 2007/08 2008/09
 BG region           14.1     10.9      10.1       13.2      15.1
 Assosa Woreda        26.5     17.9      15.4       19.5      22.5
 Bambassi             22.0     17.4      13.1       27.3      22.8
 Woreda
Source: BG, BoFED IBEX data

92. It should be noted also that irrespective of the legal and legislative framework
woredas have no revenue assignment at all. What they collected as revenue
within their territory is considered as regional revenue and considered in the
regional block grant formula. As a result of this there is a tendency for under plan
woreda revenue. However, Woredas are entitled to use revenue collected in
excess of their plan.



IV Planning and Budgeting Process
4.1. Planning process

4.1.1. STRATEGIC PLAN PREPARATION
93. The national strategic plan serves as a framework in the preparation of
regional strategic plans. Using the national plan as a guiding framework the
regional government has formulated its own strategic plan, which is consistent
with the national one but taking into consideration the regional context. The
sector-wide strategies such as ESDP and HSDP, which are developed in
consultation with the regions, serve as a framework in the preparation of regional
education and health plans, and are also effective mechanisms of ensuring
consistency of development objectives at all levels of government.




                                                                                 30
94. The process of five year
strategic plan preparation at    Figure 4.1: Planning process
                                           National Strategic Plan
regional level started with
                                           SDPRP/PASDEP
the Cabinet establishing
Task Force of technical
experts from government
and           non-government
organizations.     A    TOR
approved by the cabinet                    Regional Strategic Plan
was given to the Task
Force. The task force
collected information from
government institutions, at
region and Woreda levels,
from the community (both                  Regional Level Sectoral
urban and rural), NGOs,                   Strategic Plans
from neighboring regions,
and federal government
institutions.
95. In addition to collecting
preliminary data, national                Woreda Level Sectoral
policies, regional strategies,            Strategic Plans
performance of previous
years have been reviewed
and were used as a basis
for the plan.
96. After the preparation of the first draft, a workshop was organized and
discussion was held with relevant stakeholders. A final document was then
prepared incorporating comments from the workshop.
97. Among the main goals of the region’s five year development plan are:
Ensuring food security, increasing access to quality and equitable education,
providing improved health, increasing access to clean water and expanding
infrastructure. The regional plan has clearly set targets on agriculture, education,
health, water and roads to be achieved by implementing the five year
development strategy.
98. Sectors prepare their own strategic plan based on the national framework
and regional guidelines. Some of the sectors collect information from woreda and
consult relevant stakeholders in the preparation of sectoral strategic plans.
Woreda sector offices also prepare their own strategic plans using the regional
strategic plan as a guiding framework. However, Woredas in the region have not
yet prepared Woreda-wide strategic plans. The development objectives of ESDP
and HSDP are consistently followed up to Woreda levels.




                                                                                 31
4.2 Budget process
99. The budget process entails three major interrelated activities taking place
one after the other: i) formulation, consolidation and recommendation of budget;
ii) legislative approval and; iii) executive implementation and control.

4.2.1 FORMULATION, CONSOLIDATION AND RECOMMENDATION OF
BUDGET
100. The budget process starts with BoFED making Budget Calls every year
around January (with the budget call BoFED sends directives and focus areas).
During the budget call, BoFED does not usually get budget ceiling for the current
year from MoFED. However, MoFED sends indicative financial envelop for the
following two budget years when notifying financial envelop of the current year.
So, the budget calls are based on the indicative financial envelop provided by
MoFED on the previous year. The budget calendar is also not observed. For
instance, MoFED should notify each regional government and administrative
council of their annual subsidy by February (MoFED, 2007), but in practice it
happens around April and May.
101. At the regional level, sectors are advised to prepare their annual budget
request based on the indicative ceiling given to them and based on their last
year’s budget.
102. Having received the budget request from each public body, BoFED will
conduct ‘budget hearings’, where officials of each public body are invited to
present and justify their budget requests. This should happen between 22 March
and 23 May.
103. Once the budget hearing is completed, BoFED consolidates the region
budget and submits to the Cabinet9 along with formula and directive, who in turn
reviews it before recommending it to the council. The cabinet may ask BoFED to
make adjustments or revisions to the draft recommended budget before the
cabinet recommends it to the council when it feels necessary.

4.2.2 LEGISLATIVE APPROVAL AND APPROPRIATION OF THE BUDGET
104. The recommended budget will be presented to the council by BoFED on a
designated date between Sene 1-30, for their review, amendment and approval.
105. Once the budget is approved, public bodies are notified of their respective
approved budget through the BoFED. The public bodies then submit their
detailed action plan to BoFED.



9
 The Cabinet members are 13: Regional administrator, vice administrator, heads of; Capacity building,
Education, Health, BOFED, Administration and Security, Agriculture and Rural Devel10 In Homash
Woreda, for example, the available staff number is 3 when it should have been 10.


                                                                                                  32
106. BoFED sends to WoFEDs initially indicative financial envelope and
directive and later the approved financial envelope. Then Woredas approve their
budget through their own councils. BoFED finally prepares budget law which
includes Woreda budget.
107. The process is similar at Woreda level, but in some Woredas the Budget
and Finance Committees are not functional.

4.2.3 BUDGET IMPLEMENTATION AND MONITORING


108. After the council has approved the budget, it is the responsibility of BoFED
to inform all public bodies of their approved budget, and the public bodies are
responsible to implement their budget. It is the responsibility of each public body
to revise their physical and financial action plan if their approved budget is
different from their requested budget. The approved budget is implemented by
public bodies over the course of the financial year (i.e. from July 8 to July 7 of the
next calendar year). An approved budget that has been published in the Negarit
Gazeta serves as a legal document governing the expenditure of government
funds. Expenditure in excess of budgeted accounts by category and in total is a
violation of the law (MoFED, 2007).
109. Woredas submit monthly disbursement action plan to BoFED. Budget
disbursement is made every month accordingly. The woreda budget is divided
into 12 months and is then disbursed to Woredas every month. Woredas report
within 15 days after the end of each month.
110. The region sends action plan to MoFED and MoFED makes disbursement
according to the action plan (specifying recurrent and capital). BoFED sends
report to MoFED every quarter.
111. Mismatch between plan and resource, and not considering recurrent
implications of capital investments are among the key problems with regard to
planning and budgeting. Strategic Planning is often confined to investment
activities based on ‘needs’ and a large portion of recurrent expenditures are pre-
committed to the wage bill. For this reason annual budget is reduced to allocating
resources thinly across sectors. Annual budget allocations are dictated by
directions and priorities set in the national and regional strategic plans. However,
the mismatch between policies and available resources, results in inadequate
funding for operations.
112. Integrated policy, planning and budgeting is fundamentally about having
expenditure programs that are driven by policy priorities and disciplined by
budget realities (World bank, 1998) The challenge is to manage the tension
between ‘needs’ and ‘availability’.




                                                                                   33
Box 2: Excerpt from interview with       Box 3: Excerpt from interview with
Assosa Woreda Education Office           Assosa Woreda Agriculture and
We have five year plan, 1998-2002, but   Rural Development Office
we haven’t progressed much. We had       This year (2002), our budget is 27
a plan to construct 9 schools every      million Birr. We have 16 sector offices,
year, but because we are not having      and with this budget we can’t even hire
capital budget since 1999 the plan is    the key additional staff needed. The
not implemented. The main problem is     capital budget we have is only for 2
shortage of budget. Second during the    FTC and one hand dug well. The
planning    period,   the   Education    budget for operating expenses will last
Improvement Program has not been         only 2-3 months. After January, we will
incorporated. We take our annual plans   be forced to send staff to field without
from UPE and Education Improvement       paying per diems. When there are no
Program.                                 per diems, the work also slows down.



113. Table 4.1 below indicates the regional budget calendar in theory.
However, the regional financial calendars in practice are dictated by MoFED. The
budget calendar in regions and Woredas heavily depends on receiving timely
notification from MoFED of their annual block grant subsidies. If the regional
BoFED receives this advice late from MoFED, it means that the regional and
Woreda budget cycles and the budget preparation process falls behind schedule.

Table 4.1: Budget calendar
Budget Cycle                Time frame        Responsible body
1. Executive preparation and recommendation of budget
1.1 Budget Call and         Up to 8 February  BoFED
notification of pre-ceiling
to regional sector bureaus
and Woredas
1.2 Submission of budget Up to 21 March       Public bodies
request
1.3 Prepare                 21 March – 23 May BoFED
recommended budget
1.4 Review recommended 23 May                 Cabinet
budget
2. Legislative approval
2.1 Approval and             June             Council
appropriation of the
recommended budget
3. Executive implementation
3.1 Notification of the     8 – 14 July       BoFED
approved budget



                                                                              34
3.2 Receipt of approved     8 July – 16 August   Public bodies
budget and preparation of
action plan
3.3 Implementation of       8 July – 7 July of   Public bodies
approved budget             next year



4.2.4 DEVELOPMENTS AND TRENDS IN BLOCK GRANTS


114. The block grant formulae used for budget allocation from 1996-1998
considered
                      Figure 4.2: Budget process
population (65%),
revenue                         Council
collection/generati             Budget and Finance standing
on capacity (15%),              committee
and       level    of
development
(25%). Woredas
with           higher           Cabine
population
benefited       more
than             less
populated
Woredas           and
Woredas with low
                         budg BOFED
population      were     et     Budget Hearing Committee
facing        budget     requ
deficits.        This    estst
formula          was
replaced by a new
one.
115. From 1999                 Sector Bureau/of f ices
– 2002 the new
budget      formula
was used, and
according to this
new formula salary
expenditure was considered first - salary paid up to June 30 of the preceding
year is secured for each Woreda and bureau.


4.3 Oversight and Reporting
116. The Regional council and Woreda councils are the highest decision
making bodies at their respective levels and are among the institutions that have


                                                                              35
oversight responsibilities. Councils approve plan and budgets. The finance and
budget committee of the council reviews the proposed budget before its approval
by the council. In addition, the standing committee reviews progress reports of
sectors every six months and prepare questions. They make monitoring field
visits twice a year and make recommendations based on the outcomes of their
field visit.
117. The Regional Auditor General, which is accountable to the regional
council, has the responsibility of auditing regional and Woreda offices every year.
There are around 60 public bodies which are classified by the Auditor General
into three levels (high, medium and low) based on the amount of recurrent and
capital budget they implement. The office could cover only 55 % of the public
bodies in a year. Internal audit is weak. The Office of Auditor General has budget
and capacity problems. Main audit findings are related to purchase being
undertaken without following government rules and guidelines, making
purchases without collecting pro forma, and shortage of cash by daily cash
collectors.



V Assessment of Local Revenue Generation
5.1. Legal framework
118. The Constitution, Art. 97, provides regional states the power to
levy/determine/fix and collect income taxes on employees of the regional state
and of private enterprises; fees for land usufructuary rights; taxes on the incomes
of private farmers and farmers incorporated in cooperative associations; profit
and sales taxes on individual traders carrying out a business within their territory;
taxes on income from transport services rendered on waters within their territory;
taxes on income derived from private houses and other properties within the
regional state; rent on houses and other properties they own; profit, sales, excise
and personal income taxes on income of enterprises owned by the regional state;
fees and charges relating to licenses issued and services rendered by regional
state organs; royalty for use of forest resources; and taxes on income derived
from small and medium scale mining operations, and royalties and land rentals
on such operations. The revenue assignment of BG region is also provided by its
Constitution (see, Article 47, Proc. No. 31/2002).
119. The federal government and regional state have also a concurrent power
of taxation as provided by article 98 of the FDRE’s Constitution. The federal
government and regional state have joint power to levy and collect profit, sales,
excise and personal income taxes on enterprises they jointly establish; taxes on
the profits of companies and on dividends due to shareholders; and taxes on
incomes derived from large-scale mining and all petroleum and gas operations,
and royalties on such operations.
120. The revenue assignments of woreda administrations are provided by the
regional Constitution. Art. 87-sub article 2f of the Proc. No. 31/2002, for instance,


                                                                                  36
confers the powers to woreda administration to collect land use payment,
agricultural income tax and other incomes, to be determined by law. The woreda
is also empowered to utilize any source of revenue which may have been outside
the sum allocated and administered by the regional state. The Local Government
Policy Framework of the FDRE (MoCB, 2006) provides a detail revenue
assignment for woreda administrations. Woreda administrations shall collect
revenues from the following sources:
(i) Personal income tax (employment tax from employees of the woreda
administration and other government offices whose salary is paid from the
budget of the woreda; employment tax from employees of public enterprises
owned by the woreda administration; employment tax from employees of private
persons in the woreda;
(ii) Agricultural income tax;
(iii) Tax on rented accommodation and housing;
(iv) Business tax (schedule ‘C’ traders in accordance with income tax law, minor
mineral enterprises, and woreda owned public enterprises);
(v) Land use fees on non-agricultural enterprises;
(vi) Service charges (social services such as roads, bridges, irrigation, water
wells and medical centres; accommodation, libraries, clinics, conference halls
owned by the woreda administration; issuance of local development permits;
registration of births, marriages, divorces, deaths and registration of contracts;
licenses);
(vii) Duties (turn over tax on private business and woreda-owned enterprises,
excise tax on private business, and capital gains tax); and
(viii) Sales of moveable and immovable properties of the woreda; sand, quarry
products, soil and driftwood; sales of natural resource commodities should cease
in the event of negative impacts on the environment; sales of natural resource
products from areas restricted by the regional state should not be allowed except
on the basis of specific permits from the responsible body.
121. Some of the revenues collected by the woreda are to be shared with the
Regional State. Agricultural income tax from leased land used for agricultural
investments, royalties for minerals other than minor minerals (such as quarry
products, potash, incense, and natural resource products), and tourism fees from
visitors to the woreda tourist sites are to be shared with Regional State. Woreda
administrations shall not be allowed to borrow except with the approval of the
Regional state (See MoCB, 2006)


5.2. Institutional set up and capacity of the regional revenue authority
122. With regard to personnel almost all woredas have an average of 40%
vacant of their current structure.10 The major reason for not employing staff is
lack of budget foe personnel recruitment. Budgets are allocated only for those
employees who are in the payroll in June of the preceding fiscal year. In addition
there is no incentive structure for the employees like that of the federal which



                                                                               37
encourages the employees to discharge their responsibility fully at the best of
their capability.


5.3 Revenue generation potential of the region
123. According to a study (Plan development consulting, 2009) on the potential
revenue of the region, the region’s revenue could increase by Birr 37 million
annually without a major change in the system.

Table 5.1: Revenue potential, actual collection and gap (in million Birr, 2000)
 Revenue type                            Total potential   collection   Gap
 Income tax                              38.74             23.8         14.94
 Business profit tax                     7.3               1.2          6.1
 Other direct tax                        1.8               1.15         0.65
 Tax from investors                      23.9              0            23.9
        Land use fee                     8
        Income tax(profit tax) crop
 farmers                                 6
        Sales taxes (oil seeds)          4
        Business profit tax from other   6
 Land use and income tax-existing rate   6.75              4.6          2.15
 Indirect tax                            7.02              2.8          4.22
 Non tax revenue                         14.8              6.8          8
 Total                                   100.31            43.9         59.96
Source: Plan Development Consulting, 2009

124. As can be seen from table 5.1, the region could have collected an
additional Birr 60 million in 2000. According to this study, the revenue collected in
2000 was only 40% of the potential. The main tax base of the regional
government is salaries and wages of the public employee which constitute 55%
of the total regional revenue and 75% of the regional tax revenue.


5.4 Trends in revenue generation and structure
125. The regional revenue collected from 1997–2001 has been increasing
annually. On average, the actual total revenue collected in the period was short
of the planned revenue. Over the five year period from 1997-2001, the actual
regional revenue collected was Birr 176.88 million and this represents 92.69 % of
the planned revenue (Birr 190.8 million). It should be noted, however, that in
recent years the collection performance has improved significantly.
126. The revenue collected in 1998 was exceptionally low due to the reduction
of tax rates immediately after the 1997 election. The tax rate applied before the
election was between 30-65 % (minimum 30 % and maximum 65 %). However,


                                                                                  38
in 1998, immediately after the election, the tax rate applied was reduced to
between 7.5-10 % (minimum 7.5 % and maximum 10 %). The tax rates were
revised again after 1998, but have not been brought to their pre-election level.
The tax rate applied currently is between 10-30 % (minimum 10 % and maximum
30 %).

Table 5.2. Planned and actual revenue (in million Birr)
                           1997    1998    1999     2000     2001   Average growth
Planned regional revenue   29.98   30.0    36.0     43.0     51.8
Annual change (%)          --      0.07    20       19.4     20.6   15.0
Actual regional revenue    27.1    22.3    27.9     43.9     50.7
Annual change              --      -17.7   25.2     56.99    15.5   20.0
Performance                90.5    74.4    77.6     102.0    97.8
Source: BG, BoFED, various documents

127. The structure of the region’s revenue is dominated by revenue derived
from taxes. Of the total regional revenue collected during 1997-2001, tax
revenue, on average, accounted for 70.5 %; this is an increase from 53.9 % in
1997 to 78.7 % in 2001. The share of non tax revenue is on decline (for details
see Table 5.3 and figure 5.1 and 5.2).

Table 5.3. Regional revenue by source (in millions Birr)
 Types of revenue              1997   1998   1999     2000   2001
 Tax revenue                   14.6   15.9   19.6     31.3   39.8
         Salaries and wages    8.6    12.2   15.0     23.8   28.2
         Agricultural income   1.8    1.1    1.1      2.0    2.4
         Business profit       1.7    0.8    1.0      1.2    2.0
 Non tax revenue               12.5   6.4    8.3      12.6   10.8
        o/w rural land use     1.8    1.4    1.7      2.6    2.2
 Total revenue                 27.1   22.3   27.9     43.9   50.7
Source: BG, BoFED, IBEX data


128. As can be seen from Table 5.3, significant share of the region’s tax
revenue comes from salaries and wages. From 1998-2001, the tax revenue from
salaries and wages, on average, accounted for 75 % of the regions tax revenue
and for 55 % of the total regional revenue.




                                                                                     39
Figure 5.1: Regional Revenue Trends                                                       Figure 5.2: Trends in percentage share of tax
                                                                                          and non-tax revenue
                             60.00

                             50.00                                                                     90.00
                                                                                                       80.00
                             40.00
   Revenue in Million Birr


                                                                                                       70.00
                             30.00
                                                                                                       60.00
                             20.00
                                                                                                       50.00




                                                                                             % share
                             10.00                                                                     40.00
                              0.00                                                                     30.00
                                         1997       1998      1999        2000     2001                20.00
                                                                                                       10.00
                                                              Year
                                                                                                        0.00
                                                                                                                   1997        1998     1999      2000        2001
                                     Total Regional Revenue          Tax Revenue
                                     Non-tax Revenue
                                                                                                               % share of tax revenue     % share of non-tax revenue




Source: BG, BoFED, IBEX data


129. Comparing the per capita revenue collection in the region with country
average figure reveals the poor revenue/economic status of the region. The per
capita revenue of the region in 2001 was only Birr 77 against 507 Birr at national
level. As can be seen from Figure 5.3, the per capita revenue collected in the
region is not only very low but the rate at which it increases from year to year is
much lower than the rate at which per capita revenue increases at national level.

Figure 5.3: Comparisons and trends in per capita revenue collected (in Birr)




Source: BG BoFED, IBEX data, World Bank, MoFED


130. The same pattern is observed in per capita tax revenue (see Figure 5.4).
The gap in the level of per capita tax revenue between BG regional state and


                                                                                                                                                                  40
countrywide is increasing. This undoubtedly reveals the vertical fiscal imbalance
and to some extent the horizontal fiscal imbalance.

Figure 5.4: Comparisons and trends in per capita tax revenue collected (in Birr)




Source: BG BoFED, World Bank, MoFED


131. Per capita tax revenue in BG is increasing throughout with the exception
of a modest decline in 1999. Although the absolute gap is high with the
countrywide average, the effort of the region is encouraging as the rate at which
per capita tax revenue in BG increases faster than the countrywide does. The
annual average growth rate is 27.1% while this is just 20.7% for the countrywide.
The main reason for this difference is the rapid expansion of service providing
institutions in the region which ended up with a significant growing personal
income tax. Personal income tax in the region accounts for more than 70% on
average for the last five years while this is only 8.1% for the countrywide and
24.1% for all regions. The average annual growth rate of personal income tax
was, on the average, 35.6% for BG and 30.8% for all regions and 31.9% for
countrywide (see Table 5.4). Both the share and fast growth, by reinforcing each
other, led to higher per capita tax revenue in BG.


Table 5.4: Trend in share of personal income tax from tax revenue and its growth
(in %)
 Particulars            1997     1998     1999     2000      2001
 BG region     Share    58.6     76.8     76.4     76.0      70.7
               Growth            42.4     22.9     58.6      18.5
 All regions   Share    19.8     23.9     23.2     26.1      27.2
               Growth            20.4     8.5      18.6      75.9
 Countrywide   Share    7.6      8.6      8.1      7.2       8.8



                                                                                   41
              Growth                30.8        12.8      17.2      66.9
Source: BG BoFED and MoFED


5.5 Revenue in sample woredas

5.5.1 BAMBASI W OREDA


Revenue       collected by the
                                      Figure 5.5: Bambassi Woreda Revenue
Woreda over the five year period,
                                      Trends
1997-2001, has shown significant
growth with some fall and rise in
between. The total revenue
collected has increased from Birr
0.974 million in 1997 to Birr 2.4
million in 2001. Tax constitutes
the major source of woreda
revenue; accounting, on average,
for the last five years, for 71.6%.
The share of tax revenue has
increased from 49.7% in 1997 to
75.8% with a record of 81.1% in
2000. The tax revenue collected
showed a huge jump in 2000
(see Figure 5.5 and Table 5.5).
The main driving force for this
was the increase in personal income tax due to the presence of federal road
projects. The most important feature stand out from the figure is that the trend in
both absolute and relative values of personal income tax, rural land use fee, and
overall tax are erratic. The reason for the fluctuation of personal income tax could
be explained by the completion of projects that make good contribution to the tax
revenue in the woreda. The erratic nature of other sources of revenue might be
due to lack of systematic and regular efforts to increase collection efficiency.


Table 5.5: Bambassi Woreda revenue: trends and structure (in million Birr)
                                                  1997     1998    1999    2000    2001
Planned           Total Woreda revenue             1.15     1.15    1.14    1.31    2.68
                  Tax revenue                      0.66     0.66    0.73    0.84    1.72
                  o/w personal income tax          0.58     0.58    0.82    0.84    1.72
                  o/w agricultural income tax      0.19     0.19    0.08    0.09    0.19
                  Non-tax revenue                  0.49     0.49    0.40    0.47    0.95
Collected         Total Woreda revenue             0.97     1.19    1.08    2.55    2.42
                  Tax revenue                      0.48     0.83    0.66    2.07    1.84
                  o/w personal income tax          0.28     0.71    0.52    1.71    1.52
                  o/w agricultural income tax      0.11     0.06    0.07    0.19    0.17
                  Non-tax revenue                  0.49     0.36    0.41    0.48    0.59


                                                                                           42
                  Rural land use fee            0.09     0.05   0.08     0.18   0.14
Revenue outturn   in %                          84.4    103.2   94.7    195.7   90.5
Source: Bambasi Woreda, WoFED, various documents


132. It is very difficult to take the revenue outturn as an indicator of efficient
collection. The 195.7% performance in 2000 is not due to increased efforts in
collection. It was due to a federal road project carried out in the region which
resulted in a huge personal income tax. If we take out this the overall
performance is not strong. For instance, it was only 90.5% in 2001 (see Table
5.5). Although some part may be explained by poor planning, collection
inefficiency is critical as it is also a countrywide problem.



5.5.2 ASSOSA W OREDA


133. Assosa woreda revenue               Figure 5.6: Assosa Woreda Revenue Trends
collection    has     also   shown
increase over the five year period.
The total revenue collected has
increased from Birr 2.85 million in
1997 to Birr 5.1 million in 2001.
Tax constitutes the major source
of woreda collected revenue;
accounting, on average, for the
last five years, for 83%. The share
of tax revenue has increased
consistently from 77% in 1997 to
86% in 2000. The increase in tax
collection was very significant in
the last two years. (See Table 5.6
and Figure 5.6).


Table 5.6: Assosa Woreda revenue: trends and structure (in million Birr)
                                                1997    1998    1999    2000    2001
Planned           Total Woreda revenue           4.06    4.06    2.57    2.95    3.27
                  Tax revenue                    2.07    2.07    2.57    2.95    2.44
                  o/w personal income tax        1.83    1.83    2.27    2.61    2.08
                  o/w agricultural income tax    0.37    0.37    0.36    0.41    0.44
                  Non-tax revenue                1.99    1.99    0.73    0.85    0.83
Collected         Total Woreda revenue           2.85    2.50    2.77    3.88    5.08
                  Tax revenue                    2.19    2.03    2.28    3.27    4.37
                  o/w personal income tax        1.06    1.28    1.53    2.21    2.84
                  o/w agricultural income tax    0.18    0.16    0.12    0.23    0.27
                  Non-tax revenue                0.65    0.47    0.49    0.61    0.71



                                                                                       43
                  Land use fee                0.15    0.16     0.12     0.20    0.23
Revenue outturn   in %                        70.1    61.6    108.0    131.5   155.4
Source: Assosa Woreda, WoFED, various documents


134. The revenue outturn with the exception of 1998 has increased from year
to year and reached more than 100% since 1999. Given the limited institutional
capacity in the region, this high performance could be due to poor planning.
Since revenue collected by woreda are part of the block grant (considered in the
block grant formula) woredas do not have incentive to properly plan and perhaps
encouraged to under plan.



VI. Overview of Regional Expenditure and Financing
6.1. Financing envelop
135. The regional finance envelop is composed of regional revenue, Federal
subsidy, foreign loan and grants, road fund, water fund, federal ministries support
directly to the respective sectors in the region (example MoH’s health centre
construction), off-budget sources like NGOs and community contribution, and
other special purpose funds (there is no safety net program in the region). These
are not all known. No data on actual federal ministries support to the respective
bureaus, on all types of off-budget support including community contributions.
During the preparation of the regional strategic plan, the region had, however,
made an attempt to forecast the amount of finance that could be obtained from
various sources for the region’s strategic plan that covers the period from 1998 to
2002 (see Table 6.1 for details). However, despite the attempt to make a
forecast, there is no report on the actual financing from community contribution
and NGOs. In addition, the forecast did not include financing from Road Fund
that comes directly from federal government to the regional Rural Road Authority.

Table 6.1: Forecasted source of financing for the strategic plan period of 1998-
2002 (in Million Birr)
                         1998     1999     2000      2001      2002
Regional revenue         30       36       43        51.84     62.2
Federal subsidy          206.89   240.57   377.3     426.38    476
Loan and assistance      15.02    13.77    21.6      24.41     27.25
Community contribution   26       26.75    27.49     28.24     29
NGOs                     55.9     128.15   137       150       155.3
Total                    333.8    445.24   606.58    680.92    749.8
Source: BG, BoFED 1998 (RSP: 1998-2002)

136. According to the forecasted source of financing of the region, the average
share of federal subsidy was supposed to be 60.86 % of the total resource
envelop. NGO contribution, with 22.17% of share, was supposed to be the


                                                                                   44
second important source of finance. There is no report on the actual contributions
from NGOs and community. However, according to a report from the Bureau of
Education, community contribution in 2001 at primary and secondary schools
was Birr 1.34 million (with 97.69 % of the contribution made for primary level).
137. The actual resource envelop is by far less than the forecasted one. As
may be observed from Table 6.2, the region has failed to mobilize resources as
indicated in its strategic plan. It has managed to mobilize less than 60%. In fact in
2001 it was only 46.1% of the forecasted resource envelop that was materialized.
It should be noted, however, there is no report on the actual contributions from
NGOs and community11; thus the actual resource envelop does not have figures
on these sources of finance.

Table 6.2: Actual resource envelop for 1997-2001 (in million Birr)
                                  1997       1998       1999        2000        2001
 Regional revenue                  27.1       22.4       27.9        43.9        50.7
 Federal subsidy                 165.9      214.8      258.9       290.3       271.5
 Loan and assistance                3.9        7.0        9.5        18.3        14.1
 Road fund                          3.2        5.1        6.4         8.6         9.7
 Total resource                  200.0      249.3      302.8       360.9       345.9
Source: BG, BoFED, IBEX data and regional Road Authority

138. As may be observed from the table, the major source of the regional
resource envelop is federal subsidy. It accounts, on average, for 82.3% for the
whole period with consistent declining trend since 1998. The share has declined
from 86.2 % in 1998 to 78.5 % in 2001. When we look at how this decline in the
share of block grants is filled by the regional government, we found out that the
BG regional government has tried its best to fill the gap largely by regional
revenue (74%, see Figure 6.1). It should be noted, however, that the contribution
of regional revenue to the total resource envelop is still critically low, only 14.7%
in 2001. This figure can be even lower than this one if we consider sources like
NGOs and community contribution. There is no report, as mentioned earlier, on
the actual contributions from NGOs and community. However, according to a
report from the Bureau of Education, community contribution in 2001 at primary
and secondary schools was Birr 1.34 million (with 97.69 % of the contribution
made for primary level).


Figure 6.1: The share of other sources of resources to bridge the fall in the share
of federal block grants




11
  According to a report from the Bureau of Education, community contribution in EFY 2001 at primary
and secondary schools was Birr 1.34 million (with 97.69% of the contribution made for primary level).


                                                                                                  45
Source: BG, BoFED, IBEX data

6.2 Budget utilisation
139. The BG budget has increased from 217.3 million birr in 1997 to 379.6
million birr in 2001. In per capita terms this has increased from 365.8 birr in 1997
to 578.6 Birr in 2001. The structure of the budget is dominated by recurrent type
with a growing share (from 63.5% to 77.1%). As may be observed from Figure
6.2, a variety of patterns emerge in relation to the BG budget structure. The per
capita recurrent budget has increased from 232.3 birr to 446.1 birr. Per capita
recurrent budget increased at a rate faster than that of per capita total budget
leaving smaller space for capital budget. This trade off, as discussed with the
regional BoFED, is due to the limited budget which is largely driven by the
relative and absolute decline in federal block grants. The situation in 2001 is
special. The shift to recurrent budget is largely driven by the absolute decline in
federal block grants to the region as a result of the new block grant formula.


Figure 6.2: Evolution of regional per capita budget (in Birr)




                                                                                 46
Source: BG, BoFED, IBEX data


140. The relative and absolute decline in the federal block grant to the region
seems to lead the regional government to put a maximum effort in collecting its
own revenue. Per capita tax revenue has increased on average by 27.1% per
annum while per capita budget increased only by 12.4% per annum. For a
clearer picture Figure 6.3 graphs the trend of per capita budget with per capita
tax revenue.


Figure 6.3: Per capita total regional budget (indices, 1997=100)




Source: Figure 6.2 and 5.4


141. The budget outturn in BG region has declined consistently since 1998; the
decline is from 98.4% in 1998 to 88.3% in 2001. The trend is the same,
consistent decline, for recurrent and capital budget outturn where the sharp


                                                                             47
decline is recorded by the capital budget. While recurrent budget outturn has
declined from 99.8 to 97.6%, capital budget has declined from 94.9 to 56.9%,
thus constituting the major source for overall poor budget outturn (see Figure
6.4).


Figure 6.4: Regional budget outturn: recurrent, capital and total (in %)




Source: BG, BoFED, IBEX data


142. As may be observed from the figure, the capital budget outturn has
declined consistently and sharply. There are various reasons for this. One major
reason is the low disbursement of loan and assistance. The data we obtain from
the regional BoFED shows that there was no disbursement at all. We have also
tried to get loan and assistance data for the region from MoFED. What we obtain
from BoFED is different from BoFED. According to MoFED, the disbursement is
slow and low. It ranges between 19.8% in 1997 and 72.6% in 2000. In 2001 it
has declined to a level as low as 38%.12 In addition, disbursement does not
necessarily mean utilization. There is also an overall capacity limitation in the
region. As declining and very low capital budget outturn adversely affects the
MDGs achievement, the BG regional government has to take this as a major
source of concern and try to address the underlying causes..
143. The BG budget outturn is also a discouraging figure particularly when
compared with the national average (see Figure 6.5). The budget outturn for BG
was much higher than the national average in 1998. Since then while BG is
declining consistently, the national one was improving though slowly.



12
     Loan and assistance was about 73% of the capital budget in 2001.


                                                                              48
Figure 6.5: Budget outturn: comparison of BG with countrywide (in %)




Source: Source: BG, BoFED, IBEX data and MoFED


6.3. Regional spending by function
144. Overall the regional spending has increased from about 193 million in
1997 to about 335 million Birr in 2001, showing an annual average increment of
15%. The annual growth of all types of expenditure has declined sharply in 2001
where capital expenditure was the most affected (see figure 6.6). Capital
expenditure in 2001 was just 59% of what it was in 2000 as the capital budget
outturn was only 56.9% (see Figure 6.4). This fall can be ascribed partly to the
decline in federal subsidy and partly to the expenditure shift, shift to recurrent
expenditure. This is because while the fall in capital expenditure was 34 million,
the fall in federal subsidy was only 19 million birr.


Figure 6.6: Average annual growth rate of recurrent, capital and total expenditure
(in %)




                                                                               49
Source: BG, BoFED, IBEX data


145. The absolute decline in capital spending is also reflected in its share from
total regional spending. Of the total spending, the share of capital spending has
been decreasing and reached its lowest level in 2001, 14.8%. Most of the
available resources were spent on financing the increasing recurrent expenses
(see Figure 6.7). This share is very low by any standard and will not take the
region far in addressing the required basic service deliveries.


Figure 6.7: Trends in regional capital and recurrent spending (share in %)




Source: BG, BoFED, IBEX data


                                                                              50
146. The availability of resources to manage operation activities determines the
quality of services provided. The share of operational expenditures from the total
recurrent expenditure is consistently declining except a modest recovery in 2001.
It should be noted, however, that the share of operational expenses are still
about 50% of the total recurrent spending (see Table 6.3 and Figure 6.8).

Table 6.3: Bureau level spending by function (in million Birr)
        Salary   Operational cost   Total recurrent   Capital   Total
 1997   28       35                 63                42        105
 1998   36       44                 81                57        138
 1999   40       43                 83                65        148
 2000   55       45                 100               75        175
 2001   62       56                 119               44        162
Source: BG, BoFED, IBEX data


Figure 6.8: Share of operational spending from total recurrent spending (in %)




Source: Table 6.3 and 7.1


147. Per capita spending in BG has increased from Birr 324 in 1997 to 511 in
2001. As may be observed from Figure 6.9, per capita spending in the region is
consistently below the countrywide per capita spending except for the year 1998.
In addition the gap has been widening since 1998.


Figure 6.9: Per capita spending: comparison of BG with countrywide (in Birr)




                                                                                 51
Source: Bg, BoFED, IBEX data

148. As may be observed from Figure 6.10, both per capita revenue and per
capita spending are increasing. The difference in level, however, is increasing
undermining the role of own revenue of BG regional state.

Figure 6.10: Trends in BG per capita spending and per capita revenue




Source: BG, BoFED, IBEX data


6.4 Regional spending by sector
149. In terms of spending by sector, on average, about 60% of the resources
were spent in the five priority sectors. Education stands out clear as a number
one priority within priorities with its share, on average about 28% for the last five


                                                                                  52
years from overall regional spending. Health and agriculture are the distant
second and third preferred sectors in the region. Road and water is the least
preferred sector within the priority sectors (see Table 6.4).


Table 6.4: Trends in regional spending by sector (in million Birr)
 Particulars                                    1997   1998   1999   2000   2001
 Bureau                           Education       13     14     34     35     32
                                  Health          10     13     15     15     18
                                  Agriculture      9     13     12     12     12
                                  Water            3     11     14      8      4
                                  Road            13     45     22     34     21
                                  All others      57     43     53    102     77
                                  Total          105    138    148    175    162
 Region total                     Education       47     59     87    101    104
                                  Health          21     26     29     34     38
                                  Agriculture     23     29     28     31     34
                                  Water            5     13     16     10      6
                                  Road            13     46     23     35     22
                                  All others      84     78     94    152    131
                                  Total          193    251    278    332    335
 Share from region spending (%)   Education       25     23     31     30     31
                                  Health          11     11     11     10     11
                                  Agriculture     12     11     10      9     10
                                  Water            2      5      6      3      2
                                  Road             7     18      8     10      6
                                  All others      43     31     34     46     39
Source: BG, BoFED, IBEX data


150. In per capita terms total poverty spending has increased from 183 Birr in
1997 to 294 Birr in 2001. It should be noted, however, that the increase in per
capita spending was in 1998 and since then there was no meaningful increase. It
somehow stagnated (see figure 6.11). The trend in per capita recurrent
expenditure was on increase except the 1999 fiscal year. Per capita capital
spending was, however, on decline since 1999. When BG is compared with
countrywide, per capita total and capital spending on poverty sectors at national
level is always above the BG average. Per capita recurrent spending in BG is,
however, larger than the national average (see Figure 6.11).

Figure 6.11: Comparison of per capita spending on pro-poor sectors in BG and
country level




                                                                                   53
Source: BG BoFED and MoFED
,,,,,./;;;;;;;;;;
151. One main feature that stands out from the figure is that per capita
spending on poverty sectors at country level is increasing at a rate faster than
that of BG region. It has increased from nearly equal in 1997 to 1.6 times that of
BG in 2001. The gap in per capita capital spending is exceptionally very high.
The spending at country level is 5.2 times larger than the level in BG region in
2001. This is not surprising as the capital budget outturn is extremely poor (see
Figure 6.4).
152. Looking the per capita spending by sector features some interesting
results. Unlike the overall per capita poverty sectors spending, per capita
spending on education and health in BG is always greater than the countrywide
average except a small decline in 2001 (see figure 6.12). The BG per capita
spending in road and agriculture is, however, lower than the countrywide
average. When we look at recurrent and capital per capita spending, BG position
does not remain the same. In each poverty sector (education, health, agriculture
and road) while recurrent per capita spending in BG is always greater than the
national average, capital per capita spending is not less than the national
average but in most cases it is on decline. The overall pattern in the BG general
budget and outturn has somehow reflected in the poverty sectors. The region is
steadily pushed to manage more of recurrent expenditure than capital
expenditure.


Figure 6.12: Comparison of per capita spending: BG and countrywide




                                                                               54
Source: BG BoFED and MoFED


153. The share in capital and recurrent spending in poverty sectors are
presented in Table 6.5. As may be observed, the capital share in health spending
at bureau level is extremely low ranging between 9.5% in 1999 and 1% in 2000.
The share of capital spending in agriculture has also exhibited a sharp decline
since 1998.
Table 6.5: Trends in capital and recurrent (share in %)
               1997                  1998                  1999                  2000                  2001
               Recurrent   Capital   Recurrent   Capital   Recurrent   Capital   Recurrent   Capital   Recurrent   Ca
 Bureau
 Education     49.7        50.3      66.0        34.0      25.3        74.7      24.6        75.4      50.0        50.
 Health        94.7        5.3       96.5        3.5       90.5        9.5       99.0        1.0       98.0        2.0
 Agriculture   78.3        21.7      77.3        22.7      98.4        1.6       98.5        1.5       97.6        2.4
 Water         53.2        46.8      85.2        14.8      14.8        85.2      28.4        71.6      64.6        35.
 Road          21.5        78.5      7.1         92.9      12.5        87.5      10.9        89.1      26.2        73.
 All others    62.6        37.4      85.9        14.1      84.6        15.4      57.5        42.5      85.8        14.
 Total         59.7        40.3      58.4        41.6      55.8        44.2      57.0        43.0      73.0        27.
 Total
 region
 Education     73.8        26.2      85.9        14.1      64.1        35.9      70.9        29.1      82.6        17.
 Health        76.9        23.1      92.5        7.5       87.4        12.6      95.6        4.4       96.9        3.1
 Agriculture   77.8        22.2      82.1        17.9      94.0        6.0       97.0        3.0       96.8        3.2
 Water         40.7        59.3      76.8        23.2      18.2        81.8      34.5        65.5      71.0        29.
 Road          21.9        78.1      7.9         92.1      13.7        86.3      12.6        87.4      28.1        71.
 All others    74.5        25.5      90.9        9.1       89.4        10.6      70.1        29.9      91.6        8.4
 Total         70.5        29.5      72.9        27.1      71.5        28.5      74.8        25.2      85.2        14.

Source: BG, BoFED, IBEX data.




                                                                                              55
154. As we pointed out above the availability of resources to manage
operational activities determines the quality of services provided. We have seen
that the trend in the share of operational expenses, in general, is declining. We
need also to look at the pattern of operational expenses at each sector. The
share of operational expenses (at regional bureau level) in each poverty sector
from their total respective recurrent spending is oscillating between 11% (road
sector) and 67% (education sector) (see Table 6.5). Since 1999 the share is
consistently declining for health and agriculture and natural resource sectors.
The share in education sector is also declining between 1998 and 2000. In
general the trend is erratic which implies poor planning. Operational expenses
are critical particularly in education and health sector for quality service delivery.
Spending in operational expenses at regional level is very low due to extremely
low share of operational expenses at woreda level. This is a source of concern
for the BG regional state as most service deliveries are woredas’ responsibility.


Table 6.5: Regional spending on priority sectors (% share of operational
expenses from their total respective recurrent expenditure)
                                      Agriculture &
                                      natural
                 Education   Health   resources         Water    Road    All others
Bureau 1997      63          49       60                31       35      58
       1998      67          51       63                89       29      45
       1999      59          51       64                46       25      50
       2000      39          40       54                37       11      47
       2001      62          43       52                39       20      47
Region 1997      17          39       35                29       35      55
       1998      19          42       43                85       30      39
       1999      14          38       40                42       27      41
       2000      8           28       30                36       13      36
       2001      15          28       28                30       20      38
Source: BG, BoFED, IBEX data


6.5 Pro-poor / policy based spending
155. One important aspect which this study is expected to shade light on is to
show the link between public spending and growth. Public expenditures can be
effective in reducing poverty only when the policy setting is right. Pro-poor
expenditures must be accompanied by pro-poor policies. This study has not
reviewed the effectiveness of different policies in the various sectors. It would
have been easier had public expenditure process (including budget
management, accountability, transparency, and so on) is based on outcomes
and impacts and not just on line items and inputs as is the case in Ethiopia. This
made it difficult to see the link between the input and the final product, growth.
The detailed evaluation of the impact of spending that attends to the efficiency


                                                                                      56
with which that spending generates services and to the impact on the intended
beneficiaries is also required, which this study have not carried out. However,
from the cursory look done in this assessment on spending it looks that the
investment made has increased the regions capital stock (physical or human)
reflecting higher flows of public funds. The public spending made in education
and health is expected to increase the stock of human capital. Similarly,
accumulation of physical capital (road, communication and power through the
federal investment) through public expenditures in infrastructure is also expected
to have a positive impact on growth. Establishing a link between public spending
and growth requires more rigorous analysis than this one which focuses on
public finance review report of the BG regional state.
156. The resource allocation in BG is driven by the policy priorities set in the
strategic plan and in regional PASDEP. The five pro-poor sectors took about 60
% of the regional spending. This is also true at the Woreda level which is about
70% (see next section). The data shows that the resource at sectoral level is
allocated to priority functions in line with the government policies and strategies.
It should be noted, however, that the share of road and water sectors both at
regional bureau and woreda level is by far low and the sectors have suffered
from low budget allocation with the resultant poor performance.
157. As establishing the effect of public spending on the poor requires
household level information that lend itself to benefit incidence analysis, which is
beyond the scope of this report, it is recommended that this is known through
further analytical work. The simple tabular analysis made in this report however
indicates that the resource allocation is as per the policy of the government and
in areas where, over the longer term, could affect the status of poverty. However,
the short terms gains that could have been obtained from investing in small scale
employment creation and on agricultural productivity might not have been fully
exploited as these sectors have obtained proportionally less amount of
resources.



VII. All woreda level spending
7.1 Woreda spending by function
158. The share of woreda spending out of total regional budget has been
increasing through the years reaching 52 % in 2001 from 46 % in 1997. This
modest increase is exclusively due to recurrent spending. The share of woreda
capital spending from the total regional capital spending has exhibited a
significant fall from 26 % in 1997 to 11 % in 2001 (see Figure 7.1). Given the fact
that most activities in the region are woredas’ expenditure assignment, the
woreda share in the BG region capital spending can be stated as below the
standard. This shows either most activities are taken care of by regional bureaus,
One would also think that the additionality criteria introduced by PBS should have
contributed to the high share of woreda spending.



                                                                                 57
Figure 7.1: Trend in Woreda share from the overall regional spending (in %)




Source: BG, BoFED, IBEX data

159. The share of woreda capital spending is not only low from the total
regional capital spending; its share has also suffered huge deterioration from the
overall woreda spending. Of the total spending in all woredas, the share of
capital spending has been decreasing and reached its lowest level in 2001,
3.2%. Most of the available resources were spent on financing the increasing
recurrent expenses (see Figure 7.2). This share is very low by any standard and
will not take woredas aboard for addressing the required basic service deliveries.

Figure 7.2: Trends in all woreda capital and recurrent spending (share in %)




Source: BG, BoFED, IBEX data

160. The annual growth of all types of expenditure has declined in 2001 where
capital expenditure was the most affected (see figure 7.3). The annual growth
rate for capital spending was below zero except for 1999. What is even more


                                                                               58
disturbing is the trend is not smooth; it is very erratic. In spite of the fact that the
period is short, the huge erratic nature of the growth of capital spending signals
either poor planning or capital spending is taken care of whenever there is left-
over resources after financing recurrent expenditure. The level of capital
spending in 2001 for more than 20 woredas in the region, for instance, was only
5.6 million Birr. One can imagine that what all these woredas can do with this
little money. It should be noted that most MGDs achievement is related with
woredas’ responsibility. Each woreda is expected to improve its basic service
delivery in providing health facilities up to and including health centre, pure water,
education both primary and first cycle secondary, and related activities.


Figure 7.3: Average annual growth rate: recurrent, capital and total spending in
all woreda (in %)




Source: BG, BoFED, IBEX data

161. The share of operational expenditures from the total recurrent expenditure
is consistently declining both at bureau and woreda level except a modest
recovery in 2001. What is even more disturbing is the decline is much faster at
woreda level than the bureau level. There is a significance difference in the
availability of operational resources at bureau and woreda levels. While regional
bureaus’ operational expenses from total recurrent ranges from 45 to 56%, this is
only between 13-26% at woreda level (see Table 7.1 and Figure 6.6).

Table 7.1: All woreda spending by function (in million Birr)
        Salary    Operational cost   Total recurrent   Capital   Total
 1997   54        19                 73                15        88
 1998   80        22                 102               11        113
 1999   93        23                 116               14        130
 2000   129       19                 148               8         156



                                                                                     59
 2001   142      25               167             6          173
Source: BG, BoFED, IBEX data


7.2 Woreda spending by sector
162. In terms of spending by sector, on average, about 70% of the resources
were spent in the five priority sectors. Like the bureau level spending, education
stands out clear as a number one priority within priorities with its share, on
average, not less than 40% for the last five years from overall woreda spending.
Agriculture and natural resources is the distant second preferred sector by
woredas. The third preferred sector is health. Water and road sectors are the
most least preferred sectors within the priority sectors. Their share for the last
five years, on average, was as low as 2.3% (see table 7.2). Water and road is
also the least preferred sectors at bureau level. This neglect is reflected in terms
of water coverage and road. The region reached coverage of only 51.3% in rural
areas and 84.6% in urban areas in 2001 against the target 74% in rural areas
and 90.1% in urban areas. The main reason for this as explained by the water
bureau is lack of adequate resources and even low share from the available
resources. The regional road authority was planned to buy 16 road construction
equipments in the five year plan period (1998-2002) but it was able to buy only
one. In this context the region will face a serious problem in achieving its planned
targets unless there is a special attention to these ‘priority sectors’.


Table 7.2: Trends in woreda spending by sector (in million Birr)
                1997     1998           1999       2000       2001
Education         34        45            54         66         72
Health            11        14            15         18         21
Agriculture       14        16            17         19         22
Water              2         2             2          2          2
Road               0         1             1          1          1
All others        27        35            41         50         54
Total             88      113            130        156        173
Share from woreda spending (%)
Education       38.9     39.8            41.3         42.4    41.6
Health          12.7     12.0            11.5         11.7    12.0
Agriculture     15.7     14.1            13.0         12.3    12.5
Water            2.2       2.0            1.3          1.1     1.4
Road             0.1       1.1            1.1          0.6     0.6
All others      30.4     31.0            31.7         32.1    31.3
Source: BG, BoFED, IBEX data


163. The share in capital and recurrent spending in poverty sectors are
presented in Table 7.3. As may be observed, except road and water in all other


                                                                                 60
poverty sectors and non-poverty sectors the share of capital spending is not only
low but also declining. This is not surprising given the fact that the share of
capital spending from overall woreda spending has declined from 16.7% in 1997
to 3.2% in 2001 (see Figure 7.2).
Table 7.3: Trends in capital and recurrent share (in %)
               1997                  1998                  1999                    2000                  2001
               Recurrent   Capital   Recurrent   Capital   Recurrent    Capital    Recurrent   Capital   Recurrent   Ca
 Education     83.1        16.9      92.0        8.0       88.4         11.6       95.0        5.0       97.0        3.0
 Health        61.7        38.3      88.7        11.3      84.4         15.6       92.7        7.3       95.9        4.1
 Agriculture   77.5        22.5      86.1        13.9      90.9         9.1        96.1        3.9       96.4        3.6
 Water         22.2        77.8      36.9        63.1      44.8         55.2       63.8        36.2      80.5        19.
 Road          100.0       0.0       39.0        61.0      30.8         69.2       70.6        29.4      62.6        37.
 All others    100.0       0.0       97.0        3.0       95.6         4.4        95.5        4.5       100.0       0.0
Source: BG, BoFED, IBEX data

164. As mentioned elsewhere in this paper, the availability of resources to
manage operational activities determines the quality of services provided. The
share of operational spending from the total recurrent spending is low and
declining (see Table 6.5, Table 7.1 and Figure 6.6). The share of operational
spending in each poverty sector from their total respective recurrent spending is
oscillating between 4% (education sector) and 77% (road sector) (see Table 7.4).
Since 1998 the share is consistently declining for education, health and
agriculture and natural resource sectors. The share of operational expenses from
total woreda education sector recurrent expenditure is exceptionally very low.
This has a serious implication on quality of primary and first cycle secondary
education in the region.

Table 7.4: All woreda spending on priority sectors (% share of operational
expenses from their total respective recurrent expenditure)
                                 Agriculture & natural
         Education     Health    resources                             Water      Road   All others
1997     6             25        19                                    20         77     52
1998     9             31        28                                    38         37     32
1999     6             26        22                                    29         35     32
2000     4             17        15                                    34         22     21
2001     4             16        15                                    20         27     28
Source: BG, BoFED, IBEX data




                                                                                                61
VIII. Overview of Sample Woreda Spending
8.1 Financing envelope
165. The major financing source for the sample woredas remain the regional
block grants. The share of regional block grants to Assosa woreda budget for the
last five years accounts for 79.9%. The same is true for Bambasi woreda, the
share is 79.4%. The increase in block grants from year to year is much faster in
Assosa woreda than that of Bambasi. In the last five years regional block grants
to Assosa woreda has increased 3.3 fold while this was only 2.8 fold for Bambasi
woreda. There is also wide difference among these woredas in increasing their
own revenue sources. The average annual growth rate of revenue varies from
17.4% in Assosa to 36.2 % in Bambasi woreda. This difference in own revenue
collection explains why regional block grants for Assosa woreda increased at a
rate faster than that of Bambasi.


166. It should be noted also that the total resource envelop that the woredas
are operating with is much more than what we presented in Table 8.1. There are
significant resources such as off-budget donor resources, community contribution
and the like that are not included in the table. Because of the lack of systematic
recording of off-budget resources, we were not able to show the complete
resource framework even for sample woredas.

Table 8.1: Resource envelop (budget) trends in sample woredas (in million Birr)
                                                              Average
                                                              annual
                           1997    1998   1999   2000    2001 growth rate
Own revenue
Bambasi                   0.974     1.2    1.1     2.6    2.4            36.2
Assosa                      2.8     2.5    2.8     3.9    5.1            17.4
Regional block grants
Bambasi                      2.9    5.8    7.1     7.5    8.3            34.0
Assosa                       5.7   11.1   15.4    17.1   18.7            38.2
Foreign Loan
Bambasi                      NA     NA     NA      NA     NA
Assosa                       NA     NA     NA      NA     NA
Foreign assistance
Bambasi                      NA     NA     NA      NA     NA
Assosa                       NA     NA     NA      NA     NA
Community contribution
Bambasi                      NA     NA     NA      NA     NA
Assosa                       NA     NA     NA      NA     NA
NGOs
Bambasi                      NA     NA     NA      NA     NA


                                                                                62
Assosa                      NA      NA     NA     NA     NA
Source: Bambasi and Assosa WoFED, various documents

Figure 8.1: Share of regional block grants from the woreda budget




Source: Table 8.1


8.2 Sample woreda spending
167. Total spending of Bambasi woreda has shown significant growth. It has
increased from 4.43 million birr in 1997 to 10.62 million in 2001, more than
double. The share of capital spending in the woreda was on increase for the first
three year and reached a record of 18.7% in 1999. Since 1999, however, it has
declined drastically and reached 0.8% in 2001. The same story is true in Assosa
woreda. Since 1999 the share of capital spending has declined alarmingly and
reached 0.3% in 2001. This share is below the average share of all woreda
capital spending. Bambasi woreda has no any money for capital spending for
education and health sectors in 2001. Assosa woreda has no capital budget
except health sector which was 72 thousand birr in 2001. The trend (see Figure
8.2 and 8.3) vividly shows that most of the available resources were spent on
financing the increasing recurrent expenses. This share is very low by any
standard and has an adverse impact on woredas’ effort in basic service
deliveries. One would not think this is an intended result. In deed while a
significant part of capital spending of most primary education facilities and to
some extent other related basic services are financed by community contribution
and NGOs, the recurrent part of spending is totally left for the woreda
administration. This has drawn most woredas’ resources to recurrent spending
and one would say comfortably that the pattern observed in the share of capital
spending is unintended result.




                                                                              63
Figure 8.2: Trends in capital and recurrent spending: Bambasi woreda (share in
   %)




Source: Bambasi and Assosa WoFED, various documents


Figure 8.3: Trends in capital and recurrent spending: Assosa woreda (share in
   %)




Source: Bambasi and Assosa WoFED, various documents


168. The share of operational expenditures from the total recurrent expenditure
in both woreda is low (see Figure 8.4). This share is below the all woreda
average figure (see Figure 6.8). As mentioned in the preceding section,
resources for operational spending are critical for quality service delivery. The


                                                                              64
observed low share in operational spending might have an adverse impact on the
quality of services being delivered.


Figure 8.4: Share of operational spending from total recurrent spending (in %)




Source: Bambasi and Assosa WoFED, various documents


169. In terms of spending by sector, on average, about 71% of the resources in
Bambasi woreda and 79% of the resources in Assosa woreda were spent in the
five priority sectors (see Table 8.2). This is much higher than all woreda average
which was only 60% (see Table 7.2). Like the bureau level and all woreda
spending, education stands out clear as a number one priority within priorities
with its share, on average, not less than 41% for the last five years in Bambasi
woreda and 49% in Assosa woreda. Agriculture and natural resources and are
the distant second and third preferred sector in Bambasi woreda respectively.
The same is true for Assosa woreda except health and agriculture have almost
equal share. Like all woreda and bureau level spending, water and road sectors
are the most least preferred sectors within the priority sectors. Their share for the
last five years, on average, was as low as 2.7% for Bambasi woreda and 1.5% in
Assosa woreda. Given that there are clear expenditure assignments at woreda
level particularly for delivering safe drinking water services, this critical shortage
of resources will undoubtedly have an adverse consequence on the MDGs
achievement.


Table 8.2: Trends in spending by sector (share in %)
                                        1997   1998    1999    2000   2001
 Bambasi   Education                      42     36      46      41     39



                                                                                   65
             Health                              14       12       10      13       15
             Agriculture & natural
             resources                           16       14       14      16       15
             Water                                1        3        2       0        1
             Roads                                0        3        2       1        1
             All poor                            72       67       75      71       71
             Others                              28       33       25      29       29
 Assosa      Education                           56       53       42      51       50
             Health                               9       15       13      14       14
             Agriculture & natural
             resources                           15       11       15      13       12
             Water                                2        0        2       0        1
             Roads                                0        2        0       1        0
             All poor                            82       81       77      79       77
             Others                              18       19       23      21       23
Source: Bambasi and Assosa WoFED, various documents



IX. Aid Utilisation13
170. The total amount of loan and assistance budgeted for the five year period
(1997-2001) by the region was Birr 125 million out of which only 52.76 million Birr
(42 %) was disbursed. The disbursement figures were taken from MoFED, while
budget figures were taken from BoFED. Disbursement figures from BoFED are
incomplete, and there is huge discrepancy on budget and disbursement figures
between that of BoFED and MoFED. Loan and assistance are also unreliable
and this is witnessed by the weak disbursement.
171. Loan and assistance accounted, on average, for 3.6 % of the total regional
expenditure. As can be seen from figures 9.1 and 9.2, the performance of loan
and assistance was lowest in 1997 (19.8 % of budget) and highest in 2000 (72.6
% of budget).




13
  Loan and Assistance does not include PBS resources – at regional level PBS is part of the Federal
subsidy


                                                                                                66
Figure 9.1: Loan and assistance budget and                           Figure 9.2: Loan and assistance performance
outturn                                                              against budget

    40                                                    37.04           80

     35                                                                   70

    30                         28.06                                      60
                                             25.15
     25                                                                   50
          19.87
    20                                            18.27                   40
                    15.02
                                                             14.05
     15                                                                   30
                                      9.49
     10                 7.01                                              20

             3.94
      5                                                                   10

     0                                                                     0
            1997     1998        1999         2000         2001                1997   1998   1999       2000   2001


                            B udget     outturn                                              %outturn




Source: BG, BoFED


X. Progress in Meeting Regional Service Delivery
Targets
172. The region has been implementing various plans since its establishment
and has achieved encouraging results in the areas of socio-economic
development. Currently the region is implementing its 2nd five year plan covering
the period 1998-2002. The plan is prepared based on the regional context and
taking the national strategic plan (PASDEP) as a framework.
173. The regional five year plan has set clear targets on agriculture, education,
health, water and roads to be achieved through implementing the strategic plan.
The following section will highlight the progress made in the past four years in the
provision of basic services against these regional targets.

Table 10.1: Key indicators and five year targets for basic services sectors
Sector         Indicator                             1997 level       target
Agriculture    Total production/quintal                         1.98           3.05
               Agricultural extension worker                     183            400
               FTC                                                17             91
               Cooperatives (general)                             81            462
               Vet service coverage                             40.8           62.8
Education      Primary net enrolment                         83.6 %          98.9 %
               Secondary GER                                 35.6 %           41 %
               Primary girls students                        40.4 %          46.5 %
               Primary indigenous pupils share               50.8 %           58 %
Health         Health service coverage                         56 %           90 %


                                                                                                                      67
             Infant mortality/1000 LB                          117              90
             Maternal death/100000 LB                          760             550
Water        Clean potable water coverage
                    Rural on 1.5 km                       34.15 %         74.01 %
                    Urban                                 66.19 %         90.06 %
Road         road density in km per 1000km2                   15.6            36.2
Source: BoFED, 2006



174. The plan provides all the strategies and major activities that have been
planned in the region for all the economic and social service sectors. The
following section will highlight the progress made in the past four years in the
provision of basic services against these regional targets.

10.1 Education
175. Education coverage has shown improvements at all levels. The number of
primary schools has increased from 312 in 1997 to 347 in 2001, and the number
of students has also increased from 131,672 in 1997 to 148,288 in 2001. To
increase access to education for out of school children, especially girls in remote
areas of the region, the Regional Education Bureau and other development
partners have been promoting alternative basic education (ABE) as a
complementary for formal education. The enrolment has increased 4.3 fold
between 1997 and 2001 (see Table 10.2).
176. The region has achieved a higher GER and NER in primary education
which is above the national average for the last five years. The trend at which the
enrolment rate increases is, however, behind the national average, Since 1998
the NER in BG for primary education on decline while the countrywide NER is on
increase see Figure 10.1 and 10.2). The decline in enrolment rate in BG is partly
explained by the rapid expansion of ABE and the tendency of parents to keep
their kids close to where they live.


Table 10.2: ABE enrolment by year
Year     Male    Female      Total
1997      2,931    2,718      5,649
1998      8,536    7,442     15,984
1999    11,862     8,796     20,658
2000    13,063     9,700     22,763
2001    13,860 10,314        24,174
Source: BG, BoE

Fig 10.1: GER in primary education: comparison of BG with countrywide (in %)




                                                                                68
Source: BG Education Bureau and MoE

Fig 10.2: NER in primary education: comparison of BG with countrywide (in %)




Source: BG Education Bureau and MoE

177. The Gender Disparity Index (GDI) for NER is, however, on decline; more
girls are enrolled. Exception to this is the sharp increase in GDI in 2001
(enrolment of girls were lower than boys). In addition the GDI for BG is
consistently below the national average (see Figure 10.3).14 The region has to
investigate why the enrolment of girls in 2001 relatively fall and try to address the
underlying cause.
Figure 10.3: Gender Disparity Index (GDI) for NER primary education:
comparison of BG with countrywide (in %)



14
     The same pattern is observed in GDI for GER in primary education.


                                                                                  69
Source: BG Education Bureau and MoE

178. The GER for first cycle secondary education of BG region is consistently
higher than the national average and the gap, on average is increasing. In this
regard the achievement of BG is commendable. The GDI is, however, below the
national average for the period under consideration. What is encouraging is that
the region is trying to narrow the gap (for details see Figure 10.4 and 10.5).


Figure 10.4: GER in first cycle secondary education (9-10): Comparison of BG
with countrywide (in %)




Source: BG Education Bureau and MoE




                                                                             70
Figure 10.5: Gender Disparity Index (GDI) for GER in first cycle secondary
education: comparison of BG with countrywide (in %)




Source: BG Education Bureau and MoE


179. The availability of qualified teachers both at primary and secondary is at
stake. In the second cycle of primary school and secondary school the
percentage of qualified teachers is 63% and 22.5% respectively. Gender
disparity is also another serious concern.
180. The region has made good progress in access, especially at primary level.
The major educational challenge of the region currently appears to be in the
areas of quality, efficiency and equity. The efficiency of education is considered
to be unsatisfactory, with many pupils repeating and dropping out. Repetition is
high compared to other regions and the national average. Total primary school
dropout rate in 1999 was 12.9% (at national level it was 12.4 %) and 1st grade
drop out in the same year was 27 %. Food insecurity is considered to be a
contributing factor to the high dropout; Mao Como drop out, according to the
Bureau, on the 6th month due to food shortage.
181. Rapid improvements in coverage have been, unfortunately, accompanied
by deterioration in educational quality. The availability of qualified teachers both
at primary and secondary levels needs to be met and will remain a big challenge.
In the primary school 2nd cycle (5-8) and secondary school (9-10), the percentage
of qualified teachers for the level is 63 % and 22.5 % respectively.


10.2 Health
182. BG has low health infrastructure and health personnel compared to most
other regions. The region is currently implementing the Health Sectors


                                                                                 71
Development Program III (HSDP III). The main directions of the program are:
strengthening and expansion of preventive primary health care; provision of
maternal and child health services; deployment of trained health personnel;
prevention and control of communicable diseases, provision of curative health
services and construction of health infrastructure. Among the activities the region
planned to implement in order to achieve the health objectives and targets of the
five year plan include: i) training of 826 kebele health extension workers; ii)
construction of 326 health posts,16 health centers and 1 district hospital; iii)
assigning 2 health extension workers in each health post; iv) assigning 100
health officers and 250 nurses
183. The region has achieved encouraging health coverage in the last five
years. It should be noted, however, that the health coverage in the region is
consistently below the national average and the gap seems growing (see Figure
10.4). Give the last five year trend, the region seems not able to achieve its
target for 2002 which is 90% coverage. The region has to double its effort in
order to achieve its target and to narrow the gap it has with other regions.
184. In 2001, there were 2 hospitals, 29 health centers, and 235 health posts –
bringing the total number of health institutions to 266.


Figure 10.4: Health coverage




Source: MoH, Health and related indicators


185. The region has been implementing the health extension program in order
to provide equitable access to primary health care services. There are three
outcome indicators that are monitored to follow progress in implementing the
health extension program. These are construction of HP, training and
deployment of health extension workers and their supervisors. The region is
making good progress with regard to construction of HPs, and training and


                                                                                72
deployment of HEWs. The number of health posts constructed reached 235 in
2001, which is 97.9% performance against the HSDP target of 240. However, the
region is lagging behind with regard to equipping the health posts. At national
level, the cumulative total of HPs equipped at the end of 2001 reached 71.9%
(10797). The performance of BG is below the national. A cumulative number of
521 HEWs were trained and deployed up to the end of 2001, which is above the
target of 492 (106 %).
186. The region is below target with regard to HEP supervision. Supportive
supervision, which addresses the quality, technical and other constraints that
HEWs encounter in implementing the package is considered to be critical in the
process of HEP implementation. The cumulative number of HEP supervisors
trained and deployed in 2001 was 38, which is below the target of 75 (50.1%)
187. The region still remains behind on key health indicators compared to the
national level and most regions. Among them are maternal and child health
indicators. At national level in 2001, antenatal care coverage, percent of
deliveries assisted by health personnel and postnatal care were 68 %, 18 % and
34 % respectively, while that of BG were below 40 %, 5.6 % and below 5 %
respectively. On immunization coverage, the national level in 2001 for
pentavalent 3 vaccines and measles coverage were 81.6 % and 76.6 %
respectively, while that of BG was 70 % and around 50 % respectively. Infant
mortality, child mortality and under five mortality for BG in 2000 were; 84 per
1000, 80 per 1000, and 157 per 1000, while the national rates were; 77, 50 and
123. The child mortality rate of BG was the highest in the nation (FMoH, 2000).
188. Although there have been improvements over the last few years, the
region still faces shortage of health personnel, especially specialists. There are a
total of 658 health personnel in the region. Of the required 1st grade (PHCU)
health personnel, only 62.5 % are available. In addition, at Woreda health offices
only 13 percent of the required professionals are available.


10.3 Water
189. Low coverage of access to clean potable water and exposure to
communicable and water born diseases are among the challenges of the region.
Access to clean potable water in 1997 was 34.2% and 66.2% for rural and urban
areas respectively. By the end of the five year period, 2001, coverage was
planned to increase to 74% and 90.1% for the rural and urban areas respectively.
The regional government, in collaboration with development partners, has been
investing on the water sector in order to achieve one of its development
objectives of Universal Access to clean and potable water. Accordingly, the water
sector has been constructing new water schemes and maintaining existing
schemes to achieve this objective. Despite the efforts, the region reached
coverage of only 51.3% in rural areas and 84.6% in urban areas in 2001 (see
Figure 10.5). The target for rural areas, however, does not seem to be attainable
given the trend of both achievements and resources at the disposal of the sector.


                                                                                 73
The main reasons for not being able to achieve the target are: resource
limitation, shortage of human resource, low capacity of contractors, shortage of
vehicles, and low infrastructure.




Figure 10.5: Rural access to clean water supply (in %)




10.4 Road
190. The road sector has managed to construct 282.6Kms in the last four
years, with the implementation rate of 75%. All weather road network of the
region has increased from 597 kilometers in 1992 to 787 kilometers in 1997. The
road density in km per 1000km2 increased from 11.5 in 1992 to 15.5 km in 1997,
and it is planned to increase to 36.2 km by the end of the five year period, i.e, in
2002.
191. The road authority hadplanned to buy 16 road construction equipments in
the five year plan period but it was able to buy only one. Given this and the fact
that the regional road authority is not planning to construct new roads any more
due to capital budget constraints, it is unlikely for the region to achieve its target
of reaching road density of 36.2km by the end of 2002.



Table 10.3: Five year targets of the regional road authority


                                                                                   74
                                      Five year      Achievement      Performance
                                        target        up to 2001          in %
New road construction                      377 km            282.6            74.96
Road design/study                          541 km             139              25.6
Heavy Road maintenance                         390          268.91            68.95
Light road maintenance                    2504 km         1934.68             77.26
Rehabilitation                                  46              53           115.22
Community road                            5672 km            4438             78.24
Purchase of equipment                           16               1             6.25
Source:


10.5 Agriculture
192. The priority of the agricultural sector is to ensure food security through
expanding the extension program. The region has planned various interventions
aimed at achieving fast and sustained development on the principles of
diversification, specialization and comparative advantages. With regard to
ensuring food security, the sector as part of its five year development strategy is
implementing several interventions centered around household extension
package. Among the key targets in this category is to increase food production
from 1.5 million quintals in 1997 to 3.8 million quintals at the end of the five year
period, 2002. According to a report of the Bureau, 55.2 percent of this target has
been achieved by 2001. Area of irrigated land has increased from 2000 hectare
to 8000hectars.
193. The development of small-scale irrigation as indicated in the region’s five
year strategic plan is among the strategies employed to increase productivity and
provide additional income opportunities for the rural poor. The development and
implementation of the schemes could contribute to the overall regional effort of
poverty reduction and the betterment of the living condition of the farming
community.


XI. Lessons and Challenges


Planning and budgeting process
194. Improved involvement and consultation process in the planning process
has been observed at regional level. The alignment of plans from federal to
regional and woreda levels has been witnessed but differs among sectors. Those
sectors such as education and health that guided by sector wide approaches,
and whose service expansion is driven by norms and standards have a better
alignment of plans among the woreda, regional and federal levels. The alignment
process is facilitated when federal ministries also support regions and woredas
through technical support and resource mobilization. Those sectors which do not


                                                                                  75
exercise such kinds of planning are suffering from poor performance. The typical
example is water and road sector.
195. The regional and Woreda level budgets are approved as late as the end of
the first quarter leaving nine months for actual implementation, though sectors
and woredas do spend recurrent budget as per the previous year’s budget. This
falure to observe the budget calendar is due to the failure of the federal
government to announce the regional block grants on time which subsequently
disrupts the budget calendar at regional and woredal levels. Both regional
sectors and woreda are forced to revise their budget as information about the
level of block grants comes very late. It might be prudent to develop and
implement different but interrelated budget calendar at Woreda, regional and
federal levels.
196. Panning and budgeting are disconnected, and this is witnessed by the
massive mismatch between available resources and the resource required to
fully implement the strategic and annual plans. Policy making and planning are
not constrained by the regional fiscal space. The regional government needs to
make a realistic forecast of its medium term resource envelop and set targets
accordingly. Preparing regional level Medium –Term Expenditure Framework
could help in addressing this problem.

Resource allocation among sectors
197. The resource allocation in region is driven by the policy priorities set in the
strategic plan and in PASDEP. The five pro-poor sectors took about 60% of the
regional budget. This is even more at woreda level (70%). In per capita terms
total poverty spending has increased from 183 Birr in 1997 to 294 Birr in 2001.
The same trend was observed in terms of per capita recurrent expenditure. Per
capita capital spending was, however, declined since 1999 implying that regions
and woredas are consistently getting less capital.


198. Education stands out clear as a number one priority within priorities with
its share, on average about 28% for the last five years from overall regional
spending. Health and agriculture are the distant second and third preferred
sectors in the region. At woreda level the share of education from overall woreda
spending was, on average, about 40% for the last five years. Agriculture and
natural resources and health are the distant second and third preferred sectors at
woreda level spending. Water and road sectors are the most least preferred
sectors within the priority sectors at both regional and woreda level. This is
specifically so because the health and education resource allocation is driven by
increasing employment of civil servants including kebele level which the woredas
have very little room not to allocate once the facilities are in place. Most of the
facilities particularly primary education are constructed by community
contribution. The expenditure required for water and agriculture by contrast are
investment related and not salary driven. This neglect has brought an adverse



                                                                                 76
impact on the performance of road and water sectors. These two sectors are the
least performing.
199. One key message in relation to sectoral spending distribution is that
resource allocation is largely policy based and in areas where, over the longer
term, could affect the status of poverty and resource distribution. It should be
noted, however, that the short term gains that could have obtained from investing
in small scale employment creation and on agricultural productivity which in its
turn lend itself for asset creation, might not have been fully exploited as these
sectors have obtained proportionally less amount of resources.
200. The drastic decline in the share of capital spending particularly at woreda
level will leave the MDGs achievement at stake as most of woreda expenditure
assignments are related with MGDs. Most of the resources are allocated to
recurrent spending due to increasing expansion of basic services specially
education and health and the expanded civil service requirement partly resulting
from institutional strengthening and restructuring. While expanding basic services
and institutional strengthening are noble objectives that needs to be pursued, this
needs to be done within the fiscal space the region and woredas have, which is
increasingly not the case. This is manifested by the inability of the region to
ensure the ‘additionality’ principles of resource allocation for basic services as
stipulated in PBS and the inability of woredas to finance their salary expenditures
from their current year allocation. The balance between fiscal prudence and
expanding services may not be ascertained without significantly increasing the
domestic resource mobilization efforts. It is therefore necessary to explore
options of how to sustain meeting policy objectives while implementing resource
mobilization efforts and this also calls for a rigorous study on how to increase
woreda revenue and partial/full empowerment woreda administration for revenue
assignment.

Local revenue mobilization
201. The region has increased its revenue collection from year to year. Similar
trends have been seen at the woreda levels. The regional revenue grew from
27.1 million Birr in 1997 to 50.7 million Birr in 2001. The structure of revenue in
the region is dominated by tax revenue which accounts, on average, for 70% in
the last five years. Woredas do not have the authority to set taxes and generate
additional revenue. It is up to the regional state in consultation with federal state
to revise tax rate and up to the regional state to bring in some economic activities
in to the tax system.
202. The region managed to cover about 12.4% of its spending from own
source. The per capita own revenue in BG region has increased from Birr 46 in
1997 to Birr 77 in 2001; this is about 6.6 times lower than the national average
(507 birr in 2001). The major reason for this low own revenue is low tax rate for
the main tax base in the region: agricultural income tax. Agricultural income tax
and land use fees are simply based on land size irrespective of the amount each
producer earn and fertility of the land each producer farm. The revenue collected


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from businesses is not growing as expected. There is no data base for tax payers
and their numbers are not well known. It is also difficult to ascertain that the tax
being paid is as per the incomes generated. With this taxation framework the
potential of the region to expand its revenue base is limited as it should depend
on very small and less complaint business tax. This is further exacerbated by the
weak capacity of the revenue of office at regional and woreda levels.

Budget utilization
203. The budget outturn in BG region has consistently declined since 1998.
What is achieved in 2001 is the lowest in the last five years. The major driving
force of this poor utilisation is capital budget. The capital budget out turn has
consistently and drastically deteriorated; it has declined from 94.9% in 1998 to
56.9% in 2001. This is a discouraging trend particularly when compared with the
national average. While budget utilisation at countrywide level is on improvement
that of BG region is on decline. This can be partly explained by the limited
institutional capacity of the region.

Aid utilization
204. The outturn in aid is very poor. Aid utilisation is below 50%. The total
amount of loan and assistance budgeted for the five year period (1997-2001) by
the region was Birr 125 million, out of which only 52.76 million Birr (42%) was
disbursed. This could be again due to the institutional capacity of the region to
comply with donor requirements and partly due to donors’ poor harmonisation
and time taking and bureaucratic procedures for disbursement.

Recent progress in improving service delivery targets
205. Since the launching of PASDEP in 2005/06, the region has put effort to
progress on the MDG targets and reports from the administration shows notable
progress in basic service deliveries but with declining trend in some sectors. In
education, for instance, between 1997 and 2001, net enrolment for primary
education has declined from 84% to 74%. This should be a serious concern for
the region as ABEs are supposed to complement, not replace, formal education.
The possible reason for this could be the rapid expansion of ABE and parents
want also to keep their kids close to where they live.
206. Despite this decline, the Gender Disparity Index (GDI) for GER and NER
is on decline; more girls are enrolled but still GDI for BG is consistently below the
national average. What is encouraging is that the region is trying to narrow the
gap. The GER for first cycle secondary education of BG region is consistently
higher than the national average and the gap, on average, is increasing. In this
regard the achievement of BG is commendable. The availability of qualified
teachers both at primary and secondary is at stake. In the second cycle of
primary school and secondary school the percentage of qualified teachers is 63%
and 22.5% respectively.
207. The achievement in the water sector is not that much encouraging. The
region reached coverage of only 51.3% in rural areas and 84.6% in urban areas
in 2001 against the target 74% in rural areas and 90.1% in urban areas. The


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main reasons for not being able to achieve the target are: lack of adequate
budget, shortage of human resource, low capacity of contractors, shortage of
vehicles, and low infrastructure.
208. The region has shown modest and gradual improvements on health
coverage. Health coverage has improved from 56% in 1997 to 72% in 2001. The
region still faces shortage of health personnel. Of the required 1st grade (PHCU)
health personnel, only 62.5% are available. In addition, at Woreda health offices
only 13% of the required professionals are available.
209. The road density in km per 1000km2, 15.5km in 1997, is planned to
increase to 36.2km by the end of the five year period, i.e., in 2002. This target will
not be achieved as the current trend in budget allocation is to be continued. The
regional Road Authority, for instance, was planned to buy 16 road construction
equipments in the five year plan period but it was able to buy only one.

Recommendations
210. This report has contained a number of recommendations, including the
following:

   g) Policy making and planning should be resource constrained rather than
      driven by demands from sectors and community, which in the end
      frustrates not only the implementing offices but also the community as
      much of the plan remains unimplemented. In this regard, it is therefore
      necessary to institute mechanism by which:
      • The regional strategic plans are costed and cost implications of targets
           and strategies fully known;
      • The regional plan at all levels are driven by mapping of available
           resources from all sources;
      • Channel II and channel III resources are declared by participating
           agencies before the onset of the planning process;
      • This could be facilitated if BoFED considers introducing a three year
           rolling Medium Term Expenditure and Fiscal Framework (MTEFF); and
      • Develop, implement and adhere to a budget calendar at all levels of
           government.
   h) There is a variation among the sectors when it comes to obtaining results
      and having coherent and integrated plan. In this context it is necessary to
      initiate a sector wide program in other key sectors but more importantly in
      agriculture and rural development through conducting a jointl assessment
      with development partners and develop a common plan to ensure its
      coordinated development. Strengthen the water sector plans by learning
      from the experiences of the health and education sector planning
      processes.
   i) The existence of comprehensive region and woreda wide planning system
      is imperative for priority setting and efficient resource utilisation. It is
      therefore necessary to integrate special purpose grant programs with the
      regional plann. This could be facilitated more if there is a move towards
      developing a regional MTEFF.


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j) Strengthening the revenue collection is something that should be given
   due attention and priority. The options for expanding the revenue base
   should be explored. There is a need to implement revenue capacity
   strengthening programs (skills up-grading, ensuring protection and
   security, rewarding employees for better performance) at regional and
   woreda level similar to that of federal level. The tax harmonization
   exercise between the federal and regional levels needs to be supported by
   harmonization of management including incentives.
k) Develop systematic and regular recording and valuation mechanisms for
   community contribution and all other off budget sources, notably NGOs.
l) Monitoring and evaluation is focused on input and output indicators.
   Evaluating achievements in outcome indicators against plan after
   completion of five year plans, in addition to providing important lessons,
   could be an important input to the next five year plan and could serve as a
   basis for policy review.




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