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close this bookFinancing Cities for Sustainable Development (HABITAT - UNDESA, 67 p.)
View the document(introduction...)
View the documentAbbreviations
View the documentForeword
View the document1. Introduction
View the document2. Main Sources of Municipal Revenue
View the document3. Property Tax
View the document4. Income Tax
View the document5. Charging for Urban Services
View the document6. Tax on Provision of Goods and Services (Business Licences and Fees)
View the document7. Income-Generating Enterprises
View the document8. Borrowing
View the document9. Central Government Allocations
View the document10. Summary of Main Findings, Conclusions and Recommendations
View the documentReferences

9. Central Government Allocations


In Kenya's local government history since independence, the Central Government has allocated funds for various purposes, and in different forms. The purposes for which local authorities have benefited from central government allocations have included:

· Financing partly or wholly development of programmes of national significance, such as those identified in various development plans and included in the annual central government budget;

· Encouraging efforts of local authorities to develop programmes and undertake services in line with national policy, such as the participation of local authorities in District Development Committees (DDCs) and including those programmes identified in this forum;

· Stimulating growth in local authorities, mainly to contribute to national growth and to reduce inter-regional disparities;

· Securing an equal or higher standard of services or development and to control other forms of growth, such as developing smaller growth centres to reduce population growth pressure on the bigger towns;

· Assisting cities and towns to cope with critical fiscal situations; and

· Assisting cities and towns with relatively inferior potential for raising own direct revenues.

Generally, these allocations, have taken three different forms:

· Allocations from the central government to the municipality through the Ministry of Local Government, and other sector ministries, whose activities also include development and provision of urban services and amenities;

· Allocations from the Central Government to the Local Government Loans Authority, which in the past has provided loans to local authorities for project development; and

· Allocations made in the form of grants mainly through the Ministry of Local Government.

Sharing of taxes and revenue

It has already been observed that local governments in Kenya are assigned several taxes from which they can derive their revenue. Assigning a share of central government taxes has been avoided until the current year (1997/98), when budgetary proposals have included tax sharing of income tax and road levy funds between the central government and local authorities from the beginning of the 1998/99 fiscal year. Local Authorities will get 20 per cent of the Road Maintenance Levy and a 5 per cent share of the Central Government's annual income tax collection. This will coincide with, and compensate for, funds lost through the scrapping of the local authority service charge. Although details have yet to be worked out, Nairobi City Council, as well as other local authorities in Kenya, are looking forward to the sharing of nationally collected taxes, as proposed in the 1997-98 budget, as a way of alleviating their current revenue resource problems.


There are several types of grants, from which local authorities have benefitted from. These include:

· Multipurpose contributions to balance local authority budgets, comprehensively reconciling local government revenue with expenditure. Such grants were given to local authorities, as a lump sum, to meet the gap between expenditure needs and potential revenue of the specific councils. The central government stopped giving these grants in 1982/83.

· Grants towards the cost of specific services or projects, mainly as a match contribution or to fill a revenue gap arising from other developments affecting a specific revenue source. From the late 1970s, local authorities benefitted from the Treasury Education Grants provided to meet the revenue gap arising from free education in primary schools, the free milk programme in schools and higher teachers' salaries following significant increases. These grants were stopped in 1985/6.

· Multipurpose development grants, starting from the mid-1980s. Local authorities have received grants for a range of functions from the District Development Fund, which come through the District Development Committees (DDCs).


The total grants received by Nairobi City Council between 1980 and 1986, before the system of grants was scrapped, are shown in Table 24.

In the case of Mombasa, data also only reflects lump sum grants up to 1983/84, education grants up to 1984/85 and specific project grants that have been available throughout the period covered by the study, but on an ad-hoc basis. Multipurpose development grants, given under the DDCs, are also not included in the accounts of the council.

Mombasa received Kshs. 21 million in 1981/82 as government grant provided by the treasury to compensate for losses of revenue amid escalating costs due to developments in the education sector. In 1984/85, the Municipality received a further Kshs. 3 million, as part of these grants. When the government stopped the awarding of grants, it took over the paying of all municipal teacher's salaries.

Table 24. Analysis of recent trends in central government allocation, Nairobi City Council, (1980-1985/86) (KPounds p.a.)







GPT Compensating







School Fees







Teachers' Salaries







Pumwani Maternity Hospital







Drugs and Dressings














Source: Nairobi City Council - Abstracts of Accounts 1980 - 1985/86

The municipality also received other government grants totalling Kshs. 1.9 million and Kshs. 3.0 million in the years 1981/82 and 1988/9, respectively. These grants were given on an ad hoc basis.

In general, without the sharing of taxes and revenue, central government allocations are of little consequence to the running of large municipalities which have big budgets. They are, however, useful as stop-gap sources before other buoyant revenue sources can be put into place, and this is exactly the role they have played in the 1980s and 1990s.

The most important criteria that has been used for allocation of grants by central government has been the amount available for distribution, which has rendered them both ad-hoc and inelastic.

Timing of allocations is important in that the grants become part of the budgeted revenue for the in-coming year. In Kenya, the Central Government and Local Government financial years are similar.

The United Republic of Tanzania

When urban authorities were reestablished in 1978 they were not vested with powers to raise revenue except user charges, market stall fees and so on. The rest of the revenue was allocated by Parliament or was apportioned between them and the central government.

In 1980, the new Urban Development Policy was tabled before Parliament. This made provisions for the government to transfer to the councils some limited sources of revenue to meet part of their recurrent expenditure. They were also required to explore other ways of raising revenue other than the traditional ones. The government offered to make grants available to the councils relating to the development or maintenance of some services within their areas as shown in Table 25.

In the fully reestablished local authorities in the United Republic of Tanzania, the Local Government Finance Act of 1982 transferred several revenue sources from the central government to local authorities. There are a number of revenue sources that are shared between the central and local government. Since local authorities administer such services as primary education, primary health care, roads and so on, which are of major national interest but which are better administered at the local level, local authorities have been receiving subsidies in the form of grants from the government. Indeed, Section 10 of the Local Government Finance Act makes it obligatory for the government to provide grants annually to local authorities.

Sharing taxes and revenues

At the time of the reestablishment of local authorities in 1978, a number of revenue sources were given for sharing between the central government and local governments. These included land rent and service charges, entertainment tax, motor vehicle licence, and business licences. All were to be apportioned 50-50 between the central government and urban authorities. Also an unspecified proportion of the revenue collected by the government under the Road Traffic Act of 1972 was to go to local authorities.

In the 1991/92 budget session the Minister of Finance announced the transfer of the following sources of revenue from central government to urban authorities: business licences, entertainment tax, and hotel levy on non-tourist hotels. Currently, revenue sources shared between local and central government include business licences, petrol levy (road toll), hotel levy, and land rent.

Business licences

Urban authorities are empowered to licence some businesses while the central government licences others. In some cases, identical businesses are licensed by both the central government and urban authorities (Table 26).

Business licensing creates an arena where the powers of the urban authorities and those of the central government are not clearly defined. This leads to overlaps, confusion on the part of tax payers, and possibly non enforcement and non-compliance.

Petrol levy (road toll)

By an Act of Parliament, Road Toll became collectible effective from 14th June 1985. Since then, collections have remained pegged to a litre. As stated earlier, the current rate is Tshs. 60.00 per litre. Collection is made by the central government and Tshs. 5.00 of this is supposed to go to the local governments' Road Rehabilitation Fund. As indicated earlier, the central government, which collects the revenue, often does not transfer the share due to local authorities to them.

Table 25. Earmarked government grants to urban local authorises, the United Republic of Tanzania, 1978.

Category of expenditure

Central government grant
(per cent)

Salaries for Heads of Departments:

· Municipal and town councils


· all other town councils


Educational services (after deducting contributions of 20.00 per pupil towards UPE (Universal Primary Education))


Public Health Services (excluding user charges)



· Capital Works


· Maintenance


Drainage (sewerage and rain water)

· Maintenance


· Construction


Servicing of unallocated surveyed plots


Outbreaks of infectious diseases


Maintenance of War graves


Land and rent services charges

Split 50-50 with central government

Source: Max (1991)

Hotel levy

Hotel Levy is administered under the Hotel Levy Act of 1972 and is paid by hotel owners to the Tanzania Revenue Authority in respect of accommodation. If the hotel in question has less than ten rooms and does not provide or serve regular meals, the levy is payable to the respective local authority.

Land rent

Land rent is collected by the central government and is supposed to be shared 50-50 between the central government and the respective local authorities.

Table 26. Business licence fees collected by urban authorities and the central government, United Republic of Tanzania

Collected by Urban Authorities

Collected by the Central Government

1. Business Licence items analysis
2. Road Licence
3. Taxi, pick ups, lorry fees (Plying)
4. Intoxicating Liquor Licence
5. Motor vehicles parking fees
6. Taxi registration fees/licence
7. Local liquor licences
8. Livestock licences*
9. Fisheries licences
10. Human resources licences
11. Hunting licences
12. Weights and measures fees*

1. Business Licences clearances
2. Mineral dealer licences
3. Driving licence
4. Court broker/bailiff licence
5. Traders livestock movement licence
6. Livestock market fees*
7. Weights and measures fees*
8. Industrial licences
9. Companies Registration fees
10. Film censorship fees
11. Video licences
12. Air service licences
13. Wiremen licence
14. Cinema operator licence
15. Electrical Contractors licences
16. Private hospitals licence
17. Private doctors' licences
18. Firearm licence (collected by police)

* Identical charges levied by both the central government and urban authorities.


Grants are divided into two categories: basic grants and specific grants.

Basic grants

These are grants aimed at enabling the local governments to discharge their obligatory functions, taking into account their tax potential and other resources. The usual criteria for determining the amount of grants are: (a) the cost of the service, such as the maintenance of roads, primary education, rural and urban health and water; (b) the revenue to be raised locally; and, (c) factors of growth of the services.

Specific grants

These are given by the government as an inducement to local action and/or when a demand is made upon the authorities to develop services or functions necessary from the view point of national policy.

Over the years, however, it has been clear that the government does not give adequate grants to local authorities to enable them to fulfil their functions. The government has no formula on which to base its grants to local governments, and since 1986, the Finance Act of 1986 partially removed the government's obligation to pay all annual basic grants to local governments. Local authorities are therefore never sure of how much they will get from the central government. Moreover, such grants are never made on time, particularly in view of the differences in timing between the central government budgeting period (July-June) and that of local authorities (January to December). The ministries responsible for local government, health and education between them provide over 60 per cent of the local authorities' budgets in the form of subsidies and grants, but how much should the cost of these services be shared between the central government and the local governments is always a problem.

Government contributions in lieu of rates on property

The government owns a lot of property within the jurisdictions of local governments which benefit from the services of local authorities. The government however is not obliged to pay property tax to local governments, although the Urban Authorities (Rating) Act of 1983 empowers the Minister to change the status of any government building to being a rateable property. The Minister is also empowered to make payment to local authorities (grants) in lieu of the rates which would be payable as property taxes. This arrangement however has not been operationalized in the United Republic of Tanzania.

Table 27. Grants from the central government to Dar es Salaam & Mwanza, 1984-1996 (million Tshs)


Dar es Salaam







per cent of total revenue


per cent of total revenue





























































































A prominent feature of local government finance in the United Republic of Tanzania is the high reliance of the latter on central government grants. For the period under review, Dar es Salaam relied on the central government for between 59.5 per cent (1988) and 81.8 per cent (1995) of its revenue on the central government. Mwanza appears to be a little more self reliant than Dar es Salaam for: for 4 years out of the 13 analysed, it was able to generate more revenue than the grants it received from the central government. On the other hand this could be translated to be a result of the government giving much less money to Mwanza than to Dar es Salaam, the de-facto capital city (Table 27).

The grants to urban authorities have over the years been inadequate to meet their requirements. This is even when the cost that is supposed to be met by the central government has been well worked out, as in the case of education and health services. In the case of the road toll, although the proportion of the revenue that is supposed to be transferred to the local authorities is well known, in some years the government has not submitted this amount to the local governments. The grants seem to depend on the ability and the whims of the central government. They do not grow in accordance to need. However, while the central government might be blamed for not giving sufficient grants to the local governments, the central government is itself strained of resources to fulfil its own obligations.

As pointed out above, there is no definite allocation formula for giving grants to the local authorities, except in the case of the road toll. There are general principles of this allocation, but what is actually allocated would appear to depend on precedent and the negotiating ability of the local authorities. Historically, urban areas have been favoured over rural authorities in terms of grants from the central government. Within the urban areas, Dar es Salaam, which is by far the most endowed of the urban authorities in the country, has been receiving a disproportionately high share of the grants given to urban authorises. In 1990/91 Dar es Salaam received 64 per cent of the development subsidy earmarked for the 19 urban councils in the country, and received the highest per capita expenditure on social services. Thus, it can be said that the allocation of grants appears to be, to an extent, ad-hoc and inequitable. It is also clear from the figures for Mwanza and Dar es Salaam (Table 27) that the richer Dar es Salaam gets a higher proportion of the subsidies compared to the poorer Mwanza. In addition, the timing of the local and central government budgets differ, hence the grants are usually untimely.


In Uganda, the national constitution allows Local Governments to collect revenue on behalf of central government and to retain such amounts as to enable them to carry out any given responsibilities. This provision has so far not been applied. However, the constitution and the Local Government Act provide for three types of grants to the local governments.

Unconditional grants

These are grants given to local governments without any condition. The grants are intended to meet the cost of decentralised services as provided for in the Second Schedule of the Local Government Act, 1997. The allocation formula is quite clear:

Y1 = Y0 + bY0 + X1


Y1 is the minimum Unconditional Grant for the current fiscal year

Y0 is the minimum Unconditional Grant in the preceding fiscal year

b is the percentage change, if any, in the general price levels in the preceding fiscal year; and

X1 is the next change in the budgeted cost of running added or subtracted services in the current year.

Conditional grants

These grants are supposed to be negotiated between the central government and the local governments for specific services the central government would like to be carried out by the local governments. These grants now exceed unconditional grants, although the latter were supposed to be the main grants from the central government.

Equalisation grants

The third category of grant under the national constitution are equalisation grants. These are supposed to be given to local governments lagging behind others in national average standards in specific services. This type of grant has not been given to any local government due to lack of funds.


The amounts transferred are far from being adequate. The formula used to transfer grants seems to favour the densely populated areas.

These grants are guaranteed by the new constitution of 1995. The law allows inflation of the previous financial year to be taken into consideration, so that the grants may be considered to be buoyant and, therefore, sustainable.

Central government is still reluctant to pass on large amounts of funds to local governments, which they believe are not able to use such funds effectively. Such views have recently been expressed by high ranking officials in newspapers and other official documents.

Starting with 1997/98, the financial years of both Central Government and local governments were harmonised to 1st July to 30th June and this has improved the budgeting process at the local level.