Ghana’s public financial management act to accelerate subnational action on LEDS

Subnational Integration Working Group Co-chair Charles Akurugu explores the role of Ghana’s public financial management act in accelerating subnational action on low emission development strategies.

Finance is the key to effective decentralized governance

Resourcing subnational governments remains a central challenge to effective decentralization in Ghana, as in many other developing countries. It is well recognized that if local governments are to carry out their decentralized functions effectively, they must possess sufficient financial resources, the flexibility to raise such revenues, and the authority and mandate to make decisions about expenditures.

In Ghana, subnational governments include Metropolitan, Municipal and District Assemblies (MMDAs). While the MMDAs have the legal authority to impose taxes, the reality is that the tax base of most of these entities is so weak that they depend almost entirely on statutory and mandatory central government transfers, known as the District Assembly Common Fund. The District Assembly Common Fund is meant for development projects and programs, but unfortunately the Fund is woefully insufficient and with erratic inflows. For some time now, governments and researchers in Ghana have pondered over how to empower local government authorities to unlock the adequate revenues necessary to meet their vast development needs.

Beyond central government funds: new sources of finance for subnational governments

The country recently made strides toward authorizing local government borrowing and deepening fiscal decentralization with the passage of the Public Financial Management Act (PFMA), Act 921. This Act, which was passed in 2016, makes provisions for local government authorities to borrow funds and become liable for their debts (unless such debt is otherwise explicitly guaranteed by the central government). In the wording of this legislation, borrowing comprises raising funds through loans, advances by overdrafts, and debt securities. Importantly, borrowing by subnational governments can only occur from sources within the country. The issue of granting subnational governments’ access to international capital markets is a contested one and there is limited consensus on it.

One of the fiscal policy objectives of the PFMA is to maintain prudent and sustainable levels of debts. The Act ensures that the minister for finance, in consultation with the minister for local government, sets limits to the amount borrowed by local government authorities. These limits to borrowing should be consistent with the mid-term debt strategy and annual borrowing and recovery plan prepared by the Public Debt Management Office. However, if any local government authority wishes to borrow beyond the limit set as explained above, they will have to seek a prior written approval from the minister for finance.

While Ghana is still in the early stages of this pioneering policy initiative, it is expected that the minister for finance will make some regulations, by way of a legislative instrument, for the limit on borrowing by local government authorities and some further guidelines to advance the process. Even though the political transition in 2017 may have slowed the process somewhat, there is great interest in finalizing the process and assessing how subnational governments in Ghana can take advantage of this opportunity to raise additional revenues to meet their ever-mounting development obligations.

Opportunities for climate resilient and low carbon growth

Subnational governments in Ghana have long been recognized as leaders for ensuring sustainable development and efforts have been made to ensure that they mainstream low carbon development pathways into their planning. For instance, the Functional Organisational Assessment Tool, an incentive based tool used to assess MMDAs yearly, requires subnational governments to allocate at least 5% of the program and/or physical projects in the Annual Action Plans to climate change and disaster risk reduction issues and that at least 75% of these programs and/or projects be implemented.

The first part is easy to undertake because MMDAs have been trained and provided with a guidebook on how to mainstream climate change into planning and budgeting. However, the challenge comes during implementation due either to the non release of funds or its inadequacy. With this opportunity to raise additional revenues it is anticipated that local government authorities will redouble their efforts in sustainable development with opportunities for new business models and innovations, and derive the benefits that low carbon growth pathways has to offer as envisaged by national policies such as the Ghana Shared Growth and Development II, National Climate Change Policy, National Environmental Policy, Low Carbon Development Strategy, and the National Climate Change Adaptation Strategy 2010 – 2020.

One of the major challenges facing subnational governments in Ghana, for example, is waste management especially in the metropolitan areas. This additional financial muscle afforded to MMDAs could be leveraged to enter into public private partnerships for holistic solutions to the problem. Waste in many organized cities across the world is no more just seen as waste but a by-product and/or a resource with a potential to attract private investments if the framework and support are right.

Stepping stones for scaling up local borrowing

The roll out of this borrowing policy by subnational governments is not expected to come without challenges and all subnational governments cannot immediately take advantage of this opportunity because they all have different capacities in terms of financial base and technical know-how. A lot more needs to be done in the area of the financial ability to repay the loans over time and the technical capacity to manage the debt, transparent budgeting, and accounting.

However, with the commitment of the current government to ensure automatic transfers of the District Assembly Common Fund to curb delays in its release and the efforts to strengthen public financial management through the PFMA, Ghana Integrated Financial Management Information System, and the strengthening of internal management at the MMDAs, this policy could easily take off at the six Metropolitan Assemblies of Accra, Tema, Kumasi, Tamale, Sekondi-Takoradi, and Cape Coast since they have huge sources of internally generated funds.

Photo: Charles Akurugu