Decentralisation and Financial Peformance: A Comparative Analysis of Local Governments' Financial Sustainability in Tanzania

Abstract

This study focuses on analysing the financial sustainability of local government authorities (LGAs) in Tanzania with reference to decentralisation. In this context, the financial sustainability of LGAs is considered as an important aspect for decentralisation to succeed, especially in enhancing horizontal equity and public services in general. Specifically, the study attempts to: (i) assess and explain variations in financial sustainability across LGAs (ii) explore consequences of financial difficulties whenever they arise in the course of budget execution, and ways used to mitigate the difficulties. The study uses a quantitative approach, whereby financial indicators are used to analyse LGAs’ financial performance reports to achieve the first objective, and qualitative analysis of interview data from three case studies to achieve the second objective.
The empirical findings suggest decentralisation in Tanzania influences financial sustainability of LGAs in different ways. First, councils with a large proportion of poor people not only have low financial sustainability, low expenditure per person and low own source revenue per person but also receive a lower average grant per person. This poses the danger of exaggerating the horizontal gap in service access. Secondly, council size and population size contribute negatively while the flow of government grants and poor financial management practices contribute positively to variations in financial sustainability. Thirdly, the findings suggest decentralisation may not discourage complacency in LGAs’ revenue mobilisation and financial management practices. On the other hand, observation from the case studies suggests financial difficulties are prevalent in LGAs. They adversely affect LGAs’ operations, especially in executing development projects in priority sectors: health, education, water and agriculture. To mitigate the difficulties, LGAs involve people in service provision, cuts or postponing activities as immediate options, and seeking alternative revenues sources for the long term.
The study offers three main contributions. First, it bridges two interrelated but distinct research themes: financial sustainability and fiscal decentralisation studies. This broadens the scope of analysing both themes. Secondly, it offers insights into why decentralisation may or may not achieve its potential. This is in response to the observation from some studies, which report the outcome of decentralisation in developing countries to be limited. Lastly, it offers feedback on the way decentralisation is executed in a country that has long-standing initiatives on enhancing horizontal equity and improving provision of public services in general.