Municipalities Work - The Open University

Municipalities Work - The Open University Creating an Enabling Environment for Local Economic Development in Mozambique: The Role of Municipalities Alan Harding* + Eduardo Nguenha+ Théogene Turatsinze Final Report (Draft) May 2004 +* Formerly Centre for the Study of African Economies, University of Oxford, Swiss Agency for Development & Cooperation (SDC), Mozambique This report was commissioned under SDC’s Programme of Support to Decentralisation and Municipalisation (PADEM) in Mozambique and is based upon fieldwork undertaken in four municipalities (Vilanculos, Nacala, Cuamba and Pemba) in May and June 2003. The authors wish to thank the Presidents and members of the Municipal Councils and Municipal Assemblies in these locations, as well as representatives of private sector and civil society organisations, for their support during this research. Contents Foreword ........................................................................................................................ 4 1. Introduction ........................................................................................................... 5 2. Methodology ......................................................................................................... 8 3. Evaluating Municipal Performance 1998-2003 ......................................................... 9 3.1 Municipalisation: Success or Failure? ...................................................................... 9 3.2 Further Decentralisation ....................................................................................... 10 3.3 Evaluation Methods ............................................................................................. 12 4. Municipal Financing & Fiscal Burden ................................................................... 16 4.1 Trends in Municipal Revenues .............................................................................. 16 4.2 Municipal Taxation .............................................................................................. 18 4.3 Other Revenue Sources ........................................................................................ 20 4.4 Evaluating the Degree of Fiscal Burden ................................................................. 21 4.5 Options for Reform of Municipal Taxation ............................................................ 23 4.6 Municipal Budgeting and Strategic Planning.......................................................... 26 5. Municipalities and Regulatory Barriers .................................................................. 28 5.1 General Regulatory Issues .................................................................................... 28 5.2 Urban Land Regulation and Management .............................................................. 30 5.3 Obtaining Land Use Rights (DUAT) in Municipalities ........................................... 32 5.4 Other Regulatory Issues........................................................................................ 35 6. Service Delivery by Non-State Agents – Can it Work in Mozambique? ................... 37 6.1 Service Delivery Challenges ................................................................................. 37 6.2 Experiences of Contracting Out of Services ........................................................... 39 6.3 Constraints to Commercial Delivery of Public Services .......................................... 41 6.4 Solutions and Alternative Approaches ................................................................... 42 7. Conclusions ............................................................................................................... 44 Bibliography ................................................................................................................. 46 Annexes: 1. Case Study of Nacala Municipality: Critical Success Factors ...................................... 48 2. Matrix of Issues Covered in Field-Work.................................................................... 51 Tables and Figures Table 3.1 Matrix of Municipal Evaluation 2002 (MAE) ............................................... 14 Table 4.1 Municipal Revenues: Comparative Analysis................................................. 17 Figure 4.1 Total Municipal Revenues 1999-2002 (US$ per capita)................................. 18 Table 4.2 Are Various Municipal Taxes Applied?........................................................ 19 Table 4.3 Ranking of Major Own Revenue Sources 2002/03 ........................................ 20 Table 5.1 Percentage of Firms Ranking Issues as Problems .......................................... 28 Figure 6.1 Comparison of Infrastructure Provision in Mozambique and Selected African Countries ....................................................................................... 38 2 Boxes Box 1 Aspects of Fiscal Burden in Cuamba Municipality............................................. 23 Box 2 Findings from OECD Study on Fiscal Reform in West Africa ............................ 24 Box 3 Nacala Municipality: Plan of Activities and Budget 2003................................... 26 Box 4 Overview of Mozambican Land Policy and Implementation Problems ................ 31 Box 5 Land Acquisition in Vilanculos ........................................................................ 33 Box 6 Waste Collection in Pemba .............................................................................. 39 Acronyms Used APIE Agencia do Parque Imóvel do Estado (State Housing Agency) CFM Caminhos de Ferro de Moçambique (Mozambique Railways) DCU Direcção de Construção e Urbanização (construction and urbanisation directorate within municipality) DINAGECA Direcção Nacional de Geografia e Cadastro (National Directorate for Geography and Cadastre) DUAT Direito de Uso e Aproveitamento de Terra (Land use rights) EDM Electricidade de Moçambique FCA Fundo de Compensação Autárquico (Municipal Compensation Fund) FIIL Fundo de Investimento de Iniciativa Local (Local Investment Fund) INE Instituto Nacional de Estatística (National Statistics Institute) IVA Imposto sobre o Valor Acrescentado (Value Added Tax) MAE Ministério de Administração Estatal (Ministry of State Administration) MPF Ministério de Plano e Finanças (Ministry of Planning and Finance) NGO Non-Governmental Organisation PARPA Plano de Acção para a Redução do Pobreza Absoluta (Mozambique?s PRSP) PPP Public-Private Partnership PRSP Poverty Reduction Strategy Paper SDC Swiss Agency for Development & Cooperation TAE Taxa de Actividade Economica (Economic Activity Tax) UNIDO United Nations Industrial Development Organisation 3 Foreword In late 2001, UNIDO commissioned a study on the impact of municipalities on the 1business sector in Mozambique. This study covered the two municipalities of Tete City and Quelimane and focused on issues such as regulatory and fiscal burden, improving delivery of urban services, contracting out of service delivery and other forms of public-private partnership and strategic development planning. A seminar was jointly organised by UNIDO and the Swiss Development Corporation in Maputo in June 2002 and involving representatives of the Ministries of State Administration (MAE) and Planning and Finance (MPF) to present the results of the initial study and also to discuss how some of its main findings could be taken forward. One of the recommendations was that findings needed to be tested against the experiences of a more diverse and representative set of municipalities in Mozambique. The main objectives of the second phase of the research programme were (a) to expand the existing analytical approach to a wider range of municipalities in order to test whether findings are representative and (b) also to probe further some of the main issues of concern raised in the original study in order to ensure conclusions and eventual policy recommendations are based upon solid empirical as well as theoretical foundations. In 2003, further field visits were undertaken to the municipalities of Vilanculos, Nacala, Pemba and Cuamba. These are all small to medium-sized cities based in areas of relatively high economic development potential and with a relatively high density of entrepreneurial activities. These are also municipalities which have managed to establish a reputation for effective municipal management and good governance. The aim of the current study is to present some of the main findings from these visits. We also discuss implications for future attempts to design effective strategies for municipalities to play a positive role in the creation of an enabling environment for private sector-led local economic development in Mozambique 1 Harding, A. (2002). Role of Municipalities in Business Development in Mozambique. Vienna, United Nations Industrial Development Organisation (UNIDO): 73. 4 1. Introduction Evidence from household data shows that urban poverty is an important distinguishing feature of many developing countries, including Mozambique (Government of Mozambique, 1998; Datt 2000). Migration from rural areas into cities often puts almost impossible demands upon city administrations to provide adequate infrastructures and levels of public service delivery. However, the delivery of effective public services (including water, sanitation, energy, education and health facilities) are absolutely crucial to efforts to reduce urban poverty and improve living standards. They are also crucial to establishing an appropriate enabling environment for private sector led local economic development. In addition to their public service delivery function, in many developed countries, elected city councils or municipalities play a central role in actively promoting local economic development through a range of pro-active policies. Such policies might include direct employment generation programmes, the granting of subsidies to new labour-intensive private investments and urban regeneration programmes to improve the climate for business development by, for example, reducing crime levels. To be effective in such programmes, municipalities typically must be able to draw upon substantial financial and human capacity and also the active co-operation of the local business community. By contrast, in many developing countries, city administrations are often seen as being a barrier to economic development (Clarke and Wallsten 2002), due to their inability to resolve problems of chronically poor urban infrastructure and services and also due to their role in implementing a range of taxes, fees and regulatory procedures which hinder business entry and growth. This paper examines the extent to which these alternative scenarios currently characterise the role of municipalities in Mozambique and also the prospects for them to play a more pro-active role in stimulating local economic development in the future. We focus on three dimensions of the problem: municipal taxation and fiscal burden, regulatory barriers to firm entry and growth and the potential for enhanced service delivery by non-governmental agencies, including private companies. Promoting economic development is one of the core functions attributed to municipalities by the package of municipal legislation which was approved by the 2Mozambican National Assembly in late 1997 (in advance of the initial round of municipal elections held in October 1998 in 33 main cities and towns throughout Mozambique). Also, one of the main arguments in favour of the decentralisation of public administration systems in Mozambique is that locally elected administrations will be better able to design appropriate local development policies, due to their knowledge of local economic conditions and the 2 For background information on the municipal legislation and mandated competencies of municipalities in Mozambique, see Hanlon (1997) and Harding (2002). 5 greater legitimacy they can claim with local populations, thus resulting in further improvements of urban living standards and levels of economic opportunity – which are both important components of the government?s poverty reduction strategy, as set out in the PARPA (Mozambique?s Poverty Reduction Strategy Paper). Probably the greatest constraint facing city governments as they seek to improve urban living conditions, and conditions for business development, is the inadequecy of financial resources. However, municipalities face a dilemma. One potential source of additional revenues is taxation of private sector activity, both through the introduction of new business-related municipal taxation and enhanced efficiency in the collection of existing taxes and service fees. However, by imposing an additional fiscal burden on a narrow and fragile economic base, municipalities potentially run the risk of “choking off” future growth and investment opportunities, particularly amongst small-scale and informal sector firms. We examine trends in both levels and sources of municipal revenues for the municipalities covered, current levels of fiscal burden and future options for municipal taxation. Various recent studies have shown that complex regulatory procedures and non-transparent implementation are a major barrier to higher investment levels in Mozambique (Harding 2000; FIAS 2001; Nasir, Shah et al. 2003). These barriers are particularly detrimental to business creation and operation in major urban areas, where the majority of investment is concentrated. In this paper we examine the role of municipalities in regulating private sector activity and focus particularly on two areas of potential regulatory barriers: (a) obtaining titles for the development of urban land for commercial or industrial purposes, (b) regulations surrounding construction licensing and municipal oversight of private construction projects. If municipalities in Mozambique are to be successful in delivering enhanced services, it is generally accepted that they will need to involve the private sector or other non-state agencies in some aspects of service delivery. We evaluate some past experiences of attempts to implement public/private partnerships in Mozambique in a number of areas of service provision and discuss possible opportunities and constraints to their further utilisation in smaller municipalities. One of the main findings of this study is that there has been considerable heterogeneity in the performance of municipalities in Mozambique, with one or two examples of very proactive and successful partnerships being developed by municipalities and their local economic agencies and institutions. Some of the distinguishing features of these “best case” examples, which interestingly are not exclusively related to the availability of financial resources (as might be otherwise assumed) are: (a) a willingness to embrace opposition parties, (b) the active pursuit of a policy of co-participation between the municipal institutions and other socio-economic agencies, (c) the building and maintenance of a strong core 6 technical team given freedom by the political leadership to explore and implement alternative policy solutions, (d) a willingness to take risks in some areas of municipal policy, (e) an ability to think strategically about economic development problems and their possible solutions. Some of these success factors do not necessarily involve substantial financial investments and are hence potentially available to the majority of municipalities in Mozambique, as in many other low-income developing countries. 7 2. Methodology The findings in this paper are based upon data and other evidence collected in mid-2003 in four municipalities in the central and northern regions of Mozambique. It should be noted that these visits were undertaken before the most recent round of municipal elections held in December 2003. These municipalities were selected for review on the basis of their economic development potential, positive track record of municipal governance and also existing linkages with the SDC PADEM initiative. The municipalities visited by the research team and their respective areas of economic potential were, in chronological order: , Vilanculos – tourism, specialised seafood products , Nacala – port services, trading, transport and communication, storage, value added processing of agricultural products and fisheries , Cuamba – agricultural marketing, trading, transport, storage and communication, trading relations with vast and productive hinterland , Pemba – tourism, transport services and forestry The methodology used for this study involved the development of a matrix of issues and questions to be covered in each of the municipalities to be visited. This matrix is attached as Annex 2. An attempt was made to collect consistent information across the cities and towns visited by the research team and thus to ensure that results could be presented and analysed in a comparative manner. It should be noted that time limitations (3-4 days in each municipality) meant that in some cases we were unable to collect all of the relevant data. In particular, socio-economic data is generally not available at the level of towns and cities in Mozambique (but rather at the provincial level in annual INE statistical reports). This entails that any future attempts to fully investigate local socio-economic conditions will require an extensive programme of primary data collection. As well as a review of documentary evidence and interviews with key stakeholders, in each of the four municipalities visited we also held a seminar involving officials from the Municipal Council and Municipal Assembly, representatives from other Government agencies (provincial and district directorates) and member of civil society. The objective of these seminars was to disseminate findings from the initial 2002 UNIDO study on municipalities and the business sector, as well as to promote discussion of the potential role of the municipal authorities in supporting local economic development. 8 3. Evaluating Municipal Performance 1998-2003 Before going on to a detailed discussion of the specific ways in which municipalities impact upon conditions for local economic development, we present some general observations regarding the impact of municipalisation, based upon the experiences in the four municipalities visited, during their initial five-year mandate from 1998-2003. 3.1 Municipalisation: Success or Failure? Municipalisation in Mozambique can be judged to have been a qualified success during this period from a number of perspectives – and despite the range of difficulties faced by all of these new institutions. They appear to have succeeded in providing incentives to a wide range of concerned citizens to become involved, either individually or collectively, in seeking local solutions to local development-related problems. They have created a new sense of dynamism amongst what were, in the majority of cases, previously moribund and demoralised city administrations. This sense of community involvement and civic responsibility is something which existed in Mozambique in the early post-independence years, directed and oriented by a dynamic young Frelimo party leadership. However, this initial sense of social responsibility was dissipated by the effects of an over-centralised and authoritarian state administrative structure, a socialist philosophy of state intervention in major aspects of people?s economic and social life, the advent of civil war and increasing evidence of corruption and abuse of public office for private gain amongst some elements of the ruling party. In all municipalities visited, significant aspects of the urban infrastructure and urban service delivery have improved under the management of the new municipalities. This conclusion can almost certainly be generalised to the vast majority of municipalities. One result of the success of existing municipalities is that there is some evidence of a growing disparity between conditions for economic and social life in urban centres which are municipalities compared to those which continue to be administered by appointed district 3administrations. This situation has various possible implications: (1) economic growth trends and private sector investment levels are likely to be higher in municipalities leading to a further widening of existing levels of income inequality; 3 It is difficult to empirically test this hypothesis given the lack of localised data on trends in economic and social indicators, however there is certainly a widespread perception amongst private sector representatives interviewed that urban locations which are municipalities offer better conditions for business operation than non-municipalities. 9 (2) it is quite possible that levels of inward migration into municipalities and away from other urban centres may exacerbate over-crowding with repercussions in health and environmental degradation; (3) the success of existing municipalities will create a “demand” for further decentralisation in other urban centres, particularly those areas where opposition parties have widespread popular support. 3.2 Further Decentralisation As a result of these dynamics, there is an increasing level of public demand to proceed with further decentralisation and municipalisation in a more comprehensive and structured way than is currently taking place. There was expectation that further municipalities would be 4created in 2003, but this has not materialised. This is not due to the lack of potential candidate towns for municipalisation. In the provinces visited by the team, we had several discussions about potential alternative candidates for municipalisation, some of which in terms of objective criteria (population, density of economic activity, institutional base) appear to possess more promising attributes than some of the existing municipalities. However, there is also a perception that the process of municipalisation has become stalled by the influence of centralising interests within the ruling Frelimo party who fear the 5loss of administrative power to opposition parties in even greater parts of the country – and hence the loss of their ability to control resource allocation decisions in these areas. This is a common feature of many recent decentralisation programmes in African countries. Mitchison (2003) discusses Uganda?s radical devolution programme and argues that “another (problem) is the central inertia that militates against change through the disinclination of central bureaucracies to let go…When most of the cost of local services is met by government subvention, there will always be a tension between freedom and accountability, and a temptation at the centre to interfere.” Crook (2001) discusses the cases of Tanzania, Ghana and Nigeria and concludes that “decentralisation is unlikely to lead to more pro-poor outcomes without a serious effort to strengthen and broaden accountability mechanisms at both local and national levels”. Whatever the merits of further decentralisation, the potential success of existing municipalities is certainly being compromised in a number of ways by current central and 4 Addressing a round-table on public sector reform in March 2004, José Guambe, National Director for Local Administration in MAE, reinforced again that “in the area of municipal development, the adopted strategy is gradualism, whether in the delegation of further competencies by the state to municipalities, whether in the extension of municipalities (autarquias) to other territorial units”, th[author?s translation], TDM Conference Centre, Maputo, 29 March 2004. 10 provincial government policies towards municipalities. Some examples of the tensions between local and central interests that have emerged in the last five years include: (a) In the area of financial transfers, the FCA is insufficient to cover even basic recurrent costs of many municipalities, is being distributed at the lowest rate of 1.5% of total tax receipts and is subject to frequent delays in disbursement which means that even those municipalities with the capacity to undertake forward financial planning are unable to do so with any certainty. (b) The fact that municipalities pay IVA (value-added tax) on their expenditures on goods & services, but are not permitted to levy IVA on their incomes from the supply of goods and services (or reclaim any of the IVA they pay) entails that the net flow of funds from central government to municipalities is actually lower than commonly believed. (c) There seem to be many examples of revenues currently being collected by the local departments of the Ministry of Planning and Finance (repartiçoes das finanças) which in principle should be subsequently transferred to municipalities, but in practice are not. These include vehicle taxes (in all municipalities visited), APIE revenues from building rentals and waste collection taxes (in Pemba). (d) In the area of human resources, the fact that municipal staff inherited from the previous Executive Councils (pessoal do quadro) are state employees and cannot be dismissed or retired without substantial costs means that most municipalities are saddled with large numbers of unproductive, often incompetent and unskilled workers. Municipalities need to have the ability to set their own forms of employment contracts, with ability to both hire and fire staff depending upon their needs and also based upon their fluctuating financial capacities. (e) Another aspect of centralisation is the lack of effective articulation in some cases between municipalities and provincial directorates of sectoral ministries. Many municipalities have been investing a substantial proportion of their capital investment funds in improving local health and education facilities, largely in response to the demand from local communities for such facilities (and despite the fact that responsibility for delivery of health 6and education services has not been devolved to municipalities). However, in a number of cases these investments have been wasted due to the inability of local education and health sector officials to plan future availability of staff or due to changes in the criteria laid down for the design of these facilities. 5 In the December 2003 municipal elections, the main opposition party Renamo gained control of the Municipal Councils in five municipalities, Angoche, Beira, Ilha de Moçambique, Marromeu and Nacala. 11 To avoid further bureaucratic inertia, the Government should define a clear action plan for the development of the municipalisation programme over the next 5-10 years, setting targets for the number of municipalities to be created possibly in several phases over this period. One option would be to make existing towns (vilas) and other major population centres (postos administrativos) engage in some form of competition to be given the opportunity to become municipalities. A set of basic criteria could be established and towns etc. be invited to present their own proposals of how they meet these criteria and why they should be chosen. Relevant criteria might include population size, population density, local human resources, existing state and non-state institutions, evidence on diversity and depth of local economic base. 3.3 Evaluation Methods The Ministry of State Administration (MAE) undertook a preliminary ranking exercise for municipalities in 2002. The ministry is currently examining ways to improve the methodology for future evaluations. The existing evaluation matrix is based upon seven basic indicators: , Level of participation by citizens and community authorities in municipal management; , Relative level of the recuperation of municipal infrastructures; , Financial management and management of municipal assets (based upon audits realised); , Collection of municipal receipts (% change over period); , Quality and quantity of services provided to citizens; , Organisation and functioning of the municipal organs; , Relationship between the municipal organs and between these and the local state organs. This system has the advantage of relative simplicity (awarding a score between 1-5 across only seven variables) but also has several potential disadvantages: , Several of the indicators are non-quantifiable and hence must be based upon the value judgements of the evaluators. , There is a danger that some of the output indicators (services provided, infrastructures rehabilitated) may reward the status quo differentials between municipalities, rather than focusing upon changes in levels of current outcomes based upon municipal effort. 6 Building classrooms and clinics are examples of popular and easily deliverable capital projects which are within the limited investment budgets of most municipalities. This however entails that municipal funds are potentially being diverted away from higher-priority (but more complex) investments, such as improving sewerage and sanitation systems. 12 , Some of the indicators are subject to different interpretations e.g. number of disagreements between the Municipal Council and the Municipal Assembly could either be seen as a negative factor - reducing the chances of implementing effective policies - or alternatively as a positive factor – as evidence of a healthy democratic rivalry which will eventually result in better policy decisions. , It also seems that equal weights were attributed to each indicator in determining the final ranking, however it could be argued that some of these criteria are of greater importance than others and hence should be given higher weights. For example, quality and quantity of services provided should be given a higher ranking than the state of relationships between the Municipal Council and Municipal Assembly. , MAE has been giving more attention to the reform of the evaluation criteria rather than to the evaluation process itself, which is also of great importance in achieving results which can be both accurate and legitimate. The results of the initial ranking exercise are shown in Table 3.1. As can be seen, the four municipalities we visited are clustered at the top of the performance table. The mean score for all 33 municipalities was 21.15 with a maximum possible score of 35, the median score was 20 and the mode (the score with the greatest frequency) was also 20. It is interesting to note that the smaller cities, those classified as “Cidade D”, obtained a higher mean score 22.64 than the larger cities or the towns. This reinforces the impression that municipalisation has had its greatest impact in smaller urban centres, where the municipal authorities have been able to build upon some previous experience of city administration (under the previous executive councils) and where the scale of the service delivery problems are not so large as to be beyond the technical and financial capacity of local government institutions. There is also a significant variation in the mean scores for the specific chosen indicators, with some of the mean scores (particularly for indicators 6 and 7) being lower than others. The question is whether this genuinely represents on average weaker performance by municipalities in these areas or some other bias in the way the performance against these indicators was evaluated? 13 Table 3.1 Ministry of State Administration - Matrix of Municipal Evaluation 2002 Urban 1 2 3 4 5 6 7 Total Classificatiscore Municipality Financial Inter-InfrastructuLocal Service Internal on (city/ (out of Participation Managemeagency res Receipts Delivery Organisation town) 35) nt relations Dondo D 31 Mandlakazi Town 28 Manica D 27 Vilanculos Town 27 Nacala B/C 4 4 4 3 4 4 3 26 Cuamba D 25 Maxixe B/C 4 3 4 4 3 3 4 25 Nampula B/C 4 4 4 4 3 3 3 25 Pemba B/C 4 4 4 3 4 2 2 23 Chibuto D 22 Monapo Town 22 Gurue D 21 Manhica Town 21 Matola B/C 4 4 3 2 3 2 3 21 Montepuez D 21 Beira B/C 4 4 2 3 2 2 3 20 Chimoio B/C 3 4 3 2 3 3 2 20 Ilha de Moc. D 20 Lichinga B/C 3 4 2 2 3 3 3 20 Mocimboa Town 20 Mocuba D 20 Quelimane B/C 3 3 2 4 3 2 3 20 Tete B/C 3 3 3 3 3 3 2 20 Inhambane B/C 3 3 2 2 4 3 2 19 Milange Town 19 Xai-Xai B/C 3 4 2 2 3 2 3 19 Catandica Town 18 Chokwe D 18 Maputo City A 3 3 3 3 2 2 1 17 Moatize Town 17 Angoche D 16 Marromeu Town 15 Metangula Town 15 Mean Score (All 33) 21.15 Mean Score (Maputo & City B/C category) 21.15 Mean Score (City D category) 22.64 Mean Score (Town category) 20.20 Source: Balanco de Quatro Anos de Funcionamento dos 33 Municipios, MAE, September 2002 [Note: table needs to be completed with ranking data for smaller municipalities from MAE report] 14 One of the main objectives of such an evaluation process is to provide feedback to the local electorate about the relative performance of their own municipality which can be used as an input into their voting preferences at future municipal elections or also in lobbying for improved performance. However, the results of the initial evaluation do not appear to have been widely disseminated to the public. An important secondary objective is to identify areas in which municipalities are having difficulties in implementing the powers and responsibilities given to them by legislation, in order that more effective regulations and support programmes can be designed in the future. Some desirable characteristics of a system for evaluating municipalities in the future should be: , Main objective of the evaluation system should be to assist in promoting improvement in performance in the future, not to attribute blame for past failures; , The system should incorporate a challenge process, whereby municipalities can challenge any assessments that they consider to be unjustified; , The evaluation criteria used should be as simple as possible to allow for ease of interpretation; , The system should seek to minimise costs, both in terms of financial and human resource costs; , The evaluation should if possible be undertaken by an independent body or at least involve people who are not directly employed by the main central government stakeholders. 15 4. Municipal Financing & Fiscal Burden One of the issues facing local government in Mozambique in the next 5 – 10 years concerns the marginal and aggregate fiscal burden that further development of municipal government may place upon the private sector at local level, particularly in areas where the commercial tax base is limited. Businesses in Mozambique already face a high-cost operating environment, due, amongst other factors, to infrastructural deficiencies and a wide range of regulatory requirements [Nasir et al. 2003, Biggs et al. 1999]. It will be important to carefully evaluate the investment, growth and employment effects of both the introduction of new municipal taxes and moves to increase the general efficiency of tax collection at municipal level, particularly upon small-scale enterprises and the informal sector. The experiences with regard to recent revenue performance in the four municipalities visited are summarised in the tables below. Our main observations from this sample of municipalities are that: 1. Not all of the currently legislated municipal taxes are being collected and, even in well managed municipalities, revenues from municipal taxes remain extremely low; 2. Coverage rates (in terms of the proportion of the potential target population actually taxed) are generally low; 3. Central transfers are insufficient to meet municipalities? priority expenditure requirements; 4. The commercial tax base in these municipalities is quite narrow (limited number of taxable enterprises) and the highest fiscal burden appears to fall upon small and medium- sized formal sector enterprises; 5. The major expenditure item in all municipalities visited is salaries and other personnel costs; 6. Expenditures on key social services, including water and sanitation programmes, are very low and compromise their quality and coverage; 7. Several of the municipalities now rely heavily upon direct donor financing of priority services and capital investments, which may compromise their sustainability. 4.1 Trends in Municipal Revenues Throughout Mozambique, municipal authorities face significant fiscal constraints. Recurrent expenditures, of which a significant proportion represent personnel costs, constituted 70% of total expenditures in 2002. This left municipal councils with a continued lack of investment funds with which to address the substantial under-provision of basic urban public services. The majority of resources available consist of fiscal transfers from the central government and, increasingly, donor funds targeted at infrastructural development projects in 16 selected municipalities. Revenues from the range of municipal taxes authorised by the municipal finance law are a negligible proportion (typically less than 5%) of total revenue outside of the major cities and most of the smaller municipalities continue to rely upon revenues from a range of service fees and licences, particularly from informal urban markets and the processing of land title applications. Table 4.1 Municipal Revenues - Comparative Analysis 1998 1999 2000 2001 2002 Vilanculos total revenue (million Mt) 475 2,963 3,882 4,113 7,129 total revenue (US$ thousands) 40.1 233.8 256.4 198.6 301.3 population (estimate) 20,600 21,218 21,855 22,510 23,185 revenue per cap (US$) 1.95 11.02 11.73 8.82 13.00 Nacala total revenue (million Mt) 3,316 8,553 10,124 11,824 18,152 total revenue (US$ thousands) 279.7 674.9 668.7 571.0 767.2 population (estimate) 306,940 316,148 325,633 335,402 345,464 revenue per cap (US$) 0.91 2.13 2.05 1.70 2.22 Cuamba total revenue (million Mt) 501 2,370 3,900 4,580 5,852 total revenue (US$ thousands) 42.3 187.0 257.6 221.2 247.3 population (estimate) 58,504 60,259 62,067 63,929 65,847 revenue per cap (US$) 0.72 3.10 4.15 3.46 3.76 Pemba total revenue (million Mt) -- 4,668 5,953 -- -- total revenue (US$ thousands) -- 368.3 393.1 -- -- population (estimate) 84,460 86,994 89,604 92,292 95,060 revenue per cap (US$) -- 4.23 4.39 -- -- note: population estimates based upon 1997 census and assume 3% growth rate in municipal population per annum; US$/ Mt exchange rate based upon annual average source: revenue data provided by Municipal Council finance departments, except Pemba from Folha Informativo Table 4.1 shows the evolution of total revenues (from both own revenue sources and external transfers) for the four municipalities visited. Revenues are shown in millions of Meticais at current prices and also in thousands of US dollars to give some indication of the change in real revenue levels. We divide total revenues in US$ by an estimate of the municipal population in order to obtain an estimate of revenue per capita. This is shown in Figure 4.1. We can observe that real revenues per capita have shown only marginal increases 7in real US dollar terms in all of these municipalities over the period 1999-2002. In three 7 Revenue figures for 1998 are excluded as this was the transition year from Executive to Municipal Councils 17 cities, municipal revenues throughout this period were less than US$5 per capita per annum, which is extremely low even by African regional standards. Total revenues per capita in Vilanculos were consistently higher than the other municipalities over this period at around US$12, largely due to higher per capita central government transfers (including FCA and FIIL), which represented 60.4% of total revenues in 2002. Figure 4.1 Total Municipal Revenues 1999-2002 (US$ per capita) 14 12 10Vilanculos 8Nacala Cuamba6 Pemba4US$ per capita 2 0 1999200020012002 4.2 Municipal Taxation As can be seen from the figures presented above, the existing package of municipal taxes have quite clearly failed to date in their objective to provide a sustainable base for longer-term financial autonomy of municipalities. This is partly due to lack of effective administrative capacity within the municipalities, but is also due to the complexity and multiplicity of the different tax instruments which it is envisaged should be collected. There is some evidence that the more technically competent municipalities are beginning to build their own revenue-raising capacity through the implementation of local taxes - the most common being the Tax on Economic Activities (TAE) and the Municipal Poll Tax (IPA). However, these efforts would be more effectively directed towards the collection of a smaller number of broad-based tax instruments to ensure that revenue levels actually exceed the administrative costs of collection. In none of the municipalities visited have revenues from the 5 main municipal taxes exceeded 5% of total revenues during the first mandate from 1998-2003. This is mainly the result of the non-introduction of a number of the taxes (see Table 4.2), although even where applied the revenues generated appear to be well below their potential, indicating a combination of tax evasion and very weak enforcement capacity. In many municipalities, 18 local taxes represent only 2-3% of total revenues with the main types of own-source receipts continuing to be municipal markets, land title licences and other service fees (see Table 4.3 below). The need for simplicity and transparency in municipal council revenue efforts is reinforced by widespread public scepticism about the capacity of municipal officials to use these resources effectively. Table 4.2 Are Various Municipal Taxes Applied? Vilanculos Nacala Cuamba Pemba Imposto de Comercio e No No No No Industria (ICI) Imposto sobre No No No No Rendimento de Trabalho – Section B Imposto Predial Yes (0.7% of No No No Autarquico (IPRA) property value, payable annually) Imposto Pessoal Yes (15,000 Yes (15,000 Yes (10,000 Yes Autarquico (IPA) Mt per annum) Mt per annum) Mt per annum) Taxa por Actividade Yes (value Yes (value Yes (value Yes (details Economica (TAE) depends upon depends upon depends upon not known) size and type type of size of of business) business and business) m2 occupied) Tourism Tax (30% of No No No No proceeds transferred to municipalities) NOW ABOLISHED Vehicle Tax (collected Yes Yes Yes Yes by DPPF; 75% remitted to municipality) Note: information in this table is based on situation in these municipalities in mid-2003 There are a number of weaknesses in the current municipal taxation package, both in terms of design and implementation. Multiple taxes are difficult to administer, in several cases their administration and collection costs most probably exceed the gross revenue, their impact on poverty levels is also highly uncertain and may be regressive (in the sense that the poor pay a higher proportion of their total incomes on these taxes and fees than the non-poor), they also fail to capture or cover several important potential sources of local revenue e.g. from property investment, land transactions and local tourism revenues. 19 4.3 Other Revenue Sources The ranking of the most important sources of own revenue for the four municipalities visited is shown in Table 4.3. Municipal markets and fees paid for obtaining land titles are the two important sources of revenue in all municipalities. One of the consequences of this is that greater efforts are being put into the supply of these services (possibly at the expense of other higher-priority areas of service delivery) than into developing effective capacity to raise municipal taxes. Municipalities also face a history of non-compliance amongst tax payers and problems in persuading a sceptical public to pay for services which a considerable proportion do not receive directly e.g. waste collection, water use. Table 4.3 Ranking of major own revenue sources 2002/03 Order Vilankulos Nacala Cuamba st1 Land fees (DUAT) Land fees (DUAT) Municipal markets nd2 Municipal markets Economic Activity Economic Activity Tax Tax (TAE) (TAE) 3rd Construction licences Municipal markets Land fees (DUAT) and water fee Note: this ranking was not available for Pemba, although municipal markets are probably the major revenue source As a result of existing urban land management and regulatory policies (see Section 5 below), there is now an expanding “parallel” market in urban land in most cities and towns in Mozambique. Many middle-class Mozambicans and some foreign residents are investing heavily in property development and then making substantial capital gains from the sale of these properties or from renting out of houses and offices to both national and foreign commercial interests and the aid community. These are all potentially taxable investments and incomes which the municipalities could and should use to form the basis of their revenue base. Several municipalities are also increasingly benefiting from direct support by donor agencies to cover some aspects of their capital investment programme. However, donors are tending to be very selective about which municipalities they deal with, preferring those with a track record of competent financial management and based on an assessment of the quality of municipal leadership. While it is an intrinsic part of the process of municipalisation that local areas should compete for funds, with the more competent, honest and dynamic municipalities being rewarded for their efforts, issues of equity and need should also be considered when allocating donor support to municipalities. Market fee collection: Based upon interviews undertaken, it appears that some municipalities currently lose considerable amounts of revenue from municipal licences and 20 fees for services due to corruption and fraud. One of the most flagrant areas of diversion of funds is collection of fees in municipal markets and from informal sector traders – there is evidence that actual revenues declared to the Municipal Council?s treasuries on a daily basis are considerably below actual collection rates (perhaps as low as 20-30% of the total). Attempts in some municipalities (e.g. Pemba) to implement alternative revenue collection systems and effective controls have been blocked either within the Municipal Councils or by the Municipal Assemblies. This is an issue that requires urgent attention – as such practices undermine efforts to improve financial management systems within municipalities in general and also perpetuates public scepticism about the financial competency of local administrations. One option would be to contract out collection of market fees to a separate executive agency. This agency would have to remit a fixed amount to the Municipal Council on a weekly basis, based upon an assessment of the potential revenue streams from existing municipal markets (number of sellers) and other informal sector commercial activities. The agency would then be free to retain any revenues collected in excess of this fixed amount (and correspondingly would be penalised if their collection efforts failed to reach established targets). 4.4 Evaluating the degree of fiscal burden One of the initial objectives of this study was to make an assessment of the level of “fiscal burden” on the private sector in Mozambique attributable to municipal taxes and other costs, including licence and service fees. Such analysis is particularly relevant as companies in Mozambique already operate in a high-cost and high-risk environment. There is some anecdotal evidence that the multiplicity of taxes, fees and fines imposed upon companies in Mozambique by a range of government agencies has been responsible for the informalisation of business activities i.e. companies preferring to operate in the informal sector in order to hide from heavy-handed bureaucratic interference and the costs of formalisation (see Nasir et al. 2003). We would require a survey of a representative sample of local businesses in each municipality in order to be able to come to robust conclusions about average levels of fiscal burden. Obtaining accurate information from companies about their actual tax payments (as compared to their tax liabilities) is also a particularly difficult endeavor. Such detailed quantitative analysis was not possible on the basis of a limited number of interviews undertaken with private companies during the field-work for this study. In the most recent national survey of the Mozambican business climate (the World Bank/CTA Investment Climate Assessment 2002), both tax administration and tax rates were 21 unsurprisingly subject to private sector criticism. Within the sample of 200 mainly large and medium-scale firms, 47% of firms reported that tax administration is either a major or very severe obstacle to doing business, with 55% of firms saying the same for tax rates. However, only 10% of firms reported having been involved in a tax dispute in the last three years and in the previous year the average firm was inspected only once by national officials and twice by local tax inspectors. Additionally, managers reported that they believe that the average firm only reports 67% of its profit. Hence, “while firms complain about the discretion of tax authorities and high taxes, most firms are not reporting full profits and are not being heavily inspected”. In practice, the lack of effective application of municipal taxes and weak tax enforcement by municipal fiscais probably implies that the average company in Mozambique is actually paying a relatively small percentage of its total revenues in the form of local taxes. In some cases, companies actually expressed their willingness to pay more in the form of local taxation in return for the provision of better local services, including improved roads, street lighting and security. The burden of current municipal taxation and fees appears to fall mainly upon small-scale and informal enterprises, since most of these fees and fines (multas) are levied at a fixed rate, regardless of company size or turnover. Some companies interviewed expressed their concerns about having to pay fees and other taxes for services which are not effectively delivered. The most common of these concerned the payment of waste collection taxes (Taxa de Lixo) which have been collected with electricity bills in several cities. However, the electricity supply company EDM has withdrawn from this arrangement due to complaints and threats of non-payment from some of its customers, who presumably live in urban areas where waste collection does not occur on a regular basis. Other companies whose owners claim that they are “non-profitable” or “only marginally profitable” also complained about having to pay municipal taxes. There are also cases of companies who have become used to being able to avoid or evade fiscal officials in the past, who now resent the new municipalities stronger efforts to improve collection rates and coverage. The main concern must be the impact of taxes and other fees upon small-scale local enterprises and companies operating in the informal sector, which are both an important source of income and employment for poor people in urban areas. This issue should be the focus of further investigation. Box 1 Aspects of Fiscal Burden in Cuamba Municipality , Cuamba suffers from a narrow and not very deep economic base – mainly commercial activities, relatively few examples of local production (outside of basic agricultural 22 products), few supporting services and lack of competing business enterprises e.g. one hotel, two restaurants, one petrol station. , The existing fragile and nascent business sector faces both high costs (particularly transport costs) and also a limited local market size that does not permit substantial growth in both sales and profits. Access to regional markets is limited by distance to these markets and poor infrastructure. , Difficulties in commercialisation of agricultural products (which represents the sole source of potential income for many families in the absence of off-farm employment opportunities) due to poor infrastructure mean that levels of disposable income for the purchase of consumer products and investment in acquiring improved habitation, education and health services are low. , Firms typically face a high price elasticity of demand i.e. any increase in prices will result in a sharp fall in total revenues as consumers substitute away from the products whose price has risen e.g. consumers can substitute away from manufactured beer to own- production alcoholic beverages. , Profit margins are thus generally probably lower than in other markets and producers are vulnerable to increases in their input costs (e.g. fuel, energy, water, transport, security) which cannot be passed on to the consumer in the form of higher prices. , Businesses are thus sensitive to the “fiscal burden” imposed upon them by a range of government agencies, including municipalities – higher aggregate tax burden entails lower profit rates. Since the vast majority of businesses depend upon internal sources of finance for investment, this serves to further retard already low private investment rates. , Municipal Council attempts to both widen and deepen its fiscal resource base have thus not been successful in generating significantly higher levels of revenue, due to evasion and inability to pay. These attempts also generate resentment amongst local residents who are then less willing to participate in other aspects of the municipal development programme. 4.5 Options for Reform of Municipal Taxation International experience shows that municipalities which attempt to collect a large number of small, hypothecated taxes are frequently not successful in establishing an adequate tax base. Devas (2001) in a study of municipal financing in ten cities in the South finds that property and business taxes are the major sources of revenue for most large cities. Some of the drawbacks of property taxes are that they are often politically sensitive, unresponsive to inflation and economic growth and difficult to enforce. However, several cities have managed to secure significant resources from property taxes through improved property registration, regular revaluations and applying sanctions against defaulters. By contrast, the Devas study shows that flat-rate business taxes tend to fall disproportionately on the poor, while turnover-based taxes (i.e. where the tax is some percentage of total business revenue) are difficult to assess and may have negative economic 23 consequences, such as penalising businesses which grow rapidly or providing disincentives to legal trading activity. Such taxes on levels of economic activity may also be subject to high degrees of variance over time, in response to cyclical movements in the local business climate or negative external shocks e.g. a poor agricultural season due to drought or flood. This makes effective revenue forecasting and hence budgetary planning an extremely difficult task for municipal finance departments. Box 2 Findings from OECD Study on Fiscal Reform in West Africa The OECD has a support programme to local government finance reform in several West African countries. The Ecolog programme is working with municipal authorities in Ghana, senegal and Mali. Studies under this programme have consistently pointed to a large gap between the “fiscal potential” of the region?s mid-sized cities and the actual financial resources raised locally. In particular, real estate is virtually untaxed. They have estimated the gap between local GDP/ resources (the fiscal base) and private capital/ land taxes. Several of the main conclusions are: , Local investment financing needs are considerable, whatever criteria are used to assess them, and this is additional to the needs for maintenance of existing investments, which are of a similar order and should take priority over new investments; , At the stage that these economies have reached, where private investment levels are limited, public expenditure takes on a more important determining role in the process of local development and its insufficiency is an important obstacle to that development; , The “informal sector” generates less than half of the value-added production in these cities although it employs two thirds of the urban population; meanwhile the modern sector contributes little to the formation of local resources; , Rapid and sustainable urban growth considerably increases investment needs, but the returns would justify spreading the burden to future generations via borrowing, however there is a lack of effective financial instruments to allow this to take place; , Knowing the potential size of the tax base does not settle the problem of actually mobilising these resources. Mobilisation is based upon building citizenship and good governance – citizens generally distrust public authorities but paradoxically have got used to expecting everything from them; conversely, public officials hesitate to take the risk of levying taxes more effectively since they know that they cannot meet expectations since the needs are so large. Source: www.oecd.org/ecolog Out of the various options open to the Government, we would argue for the 8introduction of a single, unified municipal tax which would be a non-hypothecated revenue instrument to cover the provision of basic urban services and investments in public infrastructure. The tax should be levied upon all municipal residents based upon the number, size and value of properties (real estate) that they own/ occupy within the municipality. 24 The revenue aim of the municipal tax would be to achieve, within an acceptable time period (e.g. 3-5 years), 100% cost recovery for the recurrent costs of supplying a range of 9basic priority municipal services to an increasing proportion of the municipal population. This would then allow other sources of revenue – central government transfers, donor funds – to be used exclusively for overhead personnel and administration costs or for capital investment purposes. A limited number of other own-source revenues (from fees and licences) could then be used to finance the costs of a range of other secondary or supplementary services. The base for collection of this tax would be a municipal property survey which identifies and allocates a tax code to all properties located within the municipality, both residential, commercial or public properties. The tax rates would be structured in several bands (depending upon the assessed value of each property) and should be allowed to vary between different urban zones or bairros. In this way, urban planning and protection of environmentally-sensitive areas can be undertaken by levying higher municipal tax rates on properties located in certain areas and also offering discounts for occupation of properties in expansion zones. A range of exemptions or rebates can be designed in order to protect low-income families. A range of penalties should be designed to discipline non-payers of the municipal tax, including financial penalties and the ability of the municipal council to secure fixed assets. A range of payment options should be explored, including payment in monthly installments, payment in conjunction with other utilities e.g. electricity bills. Discounts can be offered in order to encourage prompt payment at the beginning of the tax year. The advantages of such a taxation system are (i) relative ease of administration and wide coverage, (ii) based upon relatively fixed assets whose value can be objectively measured and assessed i.e. properties rather than on individuals or incomes; (iii) tax should be progressive in that citizens with large or multiple properties or those with properties in desirable urban areas will pay more; (iv) can be used by the municipality as an instrument to encourage more rational use of urban land and encourage relocation of populations away from areas not suitable for habitation or which have high alternative commercial values. 4. 6 Municipal Budgeting & Strategic Plans 8 The principle of non-hypothecation is that the revenues yielded by particular tax instruments should not be restricted to financing specific items of expenditure under the budget, thus allowing flexibility in the allocation of available resources to meet expenditure priorities, which may change over time. 9 All municipalities need to accurately measure and quantify current levels of service provision and set targets for increasing coverage rates and service quality. This can be achieved by a full municipal survey of properties which would also be used as the basic register for operationalisation of the new municipal tax. Success in achieving targets should be monitored on a regular basis, with involvement of independent local and external experts in the monitoring process. 25 Apart from low levels of municipal revenue, one of the additional problems observed in several municipalities visited was the lack of adequate systems and capacity for budgeting and planning, which would help to ensure that available resources are used effectively and in areas where they generate the highest social returns. One of the distinguishing features of the success of Nacala municipality has been the capacity of the municipal council in the areas of planning and budgeting (see Box 3). Further details of Nacala?s experience are given in the case study in Annex 1. Box 3 Nacala Municipality: Plan of Activities and Budget for 2003 Nacala appears to be one of the few municipalities which has succeeded in producing a costed annual plan of activities linked to a medium-term strategic development plan. Specific activities for each of the operational directorates and services of the municipality are set out in a matrix with an indication of the predicted costing of each activity, the source of funding (own resources, FCA, FIIL, OGE) and the proposed period of execution. A detailed budget is also attached to the same document which includes a functional classification of expenditure items (salaries and remuneration, other personnel expenses, goods and services etc). As well as salaries, municipal staff also receive a transport allowance, a holiday allowance and funeral cost subsidies. Forecast sources of funding for 2003 are as follows: Own Receipts ................................................................................... 7,516,000,000 Mts FCA ................................................................................................ 5,004,000,000 Mts FIIL ................................................................................................. 1,959,900,000 Mts Environmental Fund (OGE) .............................................................. 6,000,000,000 Mts Total .............................................................................................. 20,479,900,000 Mts The 2003 budget forecasts total revenues of approximately US$ 850,000 which represents potential expenditure of $4.29 per capita for the year (based upon a municipal population of 198,000 in 1997). Another innovative feature of the Nacala budgeting process is that they are making attempts to prioritise expenditures, so that in the event of revenue shortfalls there will be a set of criteria for deciding which programmes should be maintained and which should be postponed. A sine qua non of successful municipalities is that they possess a municipal strategic development plan that is (a) well-defined and focused on priorities, (b) locally developed and owned, (c) multi-annual but with annual development targets and indicators and (d) provides costing estimates for specific projects and programmes to enable linkage to the municipal budget. Local communities should be consulted about the contents of such a strategic plan, but the municipal council should take eventual responsibility for determining the final strategic direction. There are some actions which municipalities need to implement, in order to improve social welfare, which may necessarily involve short-term negative consequences 26 for specific communities e.g. the need to relocate people away from coastal zones for environmental reasons or, in the case of Ilha de Moçambique, the need to move a substantial proportion of the local population off of the island to the mainland. These are difficult but necessary actions which local populations themselves would never advocate because they threaten their own private interests. 27 5. Municipalities and Regulatory Barriers 5.1 General Regulatory Issues Various recent studies have shown that complex regulatory procedures and non-transparent implementation are a major barrier to higher investment levels in Mozambique [Harding 2000, FIAS 2001, Nasir et al. 2003]. These barriers are particularly detrimental to business creation and operation in major urban areas, where the majority of investment is concentrated. Municipalities thus have an important role to play in creating a more favourable operating environment for businesses, both by ensuring that they do not themselves act as another layer of unhelpful bureaucracy in areas under their direct competency, but also by working with the local business community to lobby for change in other areas of regulatory constraint, including provision of utilities and other infrastructures. Table 5.1 Percentage of Firms Ranking Issues as Problems Type Problem No or Minor Moderate Large or Severe Problem Problem Problem Cost of financing 12 4 84 Access to domestic credit 18 7 75 Access to foreign credit 25 1 74 Electricity 23 13 64 Corruption 24 12 64 Macro-instability 22 15 63 Anti-competitive practices 27 13 60 Economic policy uncertainty 33 9 58 Tax rates 28 17 55 Crime theft and disorder 31 15 54 Skills and education of workers 40 10 50 Tax administration 36 17 47 Customs and trade regulations 35 20 45 Labor regulations 45 17 38 Business licenses 61 11 28 Transportation 58 15 27 Access to land 67 6 27 Telecommunications 60 20 20 Source: CTA/RPED Survey 2002. To give an overview of some of the components of an “enabling environment” and how firms in Mozambique currently perceive this environment, Table 5.1 presents a subjective ranking of problems faced by managers of a nationally representative sample of firms in 2002. A number of these regulatory issues do not fall within the direct mandate of municipalities (e.g. business registration, tax policy and administration, firm financing), but in some areas municipalities do have a direct impact on firms? location decisions and operations. For example, in facilitating companies? access to appropriate sites for their projects within the 28 municipality and also by ensuring that construction permits for any new buildings are forthcoming . Municipalities also have further roles to play in the creation of an urban environment which is free from crime and disorder, as well as in lobbying of other government agencies to facilitate obtention of necessary licenses and permits for new investors. In both Pemba and Nacala, the municipality is recognised as having played a positive role in attracting new investment, allowing companies to obtain land, start project construction and implementation even while certain bureaucratic procedures (for example, obtaining alvaras and work permits) were still being processed. Despite 10 years of regulatory reform in Mozambique, private investors and particularly foreign investors continue to be the target of a range of arbitrary government interventions at local level (during both the phases of business start-up and project implementation) which increase the cost of doing business. Nampula Province is currently seen as having one of the least favourable business operating environments in Mozambique. This view seems to be common to both national entrepreneurs and foreign investors. Significant artificial barriers to entry/ competition and growth have been erected over a considerable period of time in some strategic sectors, including commercial trade (retail and wholesale), road transport and construction. The range of bureaucratic requirements to start and operate a business is both complex and non-transparent. This provides ample opportunity for arbitrary decision-making by public officials who extract rents from companies through the application of fines (multas) and by demanding personal payments for favourable and timely decisions on various permits. The existence of such a “parallel” taxation system can be traced to the ongoing process of administrative reform and decentralisation, which rightly aims to put greater decision-making power into the hands of regional and local authorities, but often denies them the financial resources necessary (through official fiscal channels) to effectively implement their mandate. Even those public officials who wish to operate in a legal and responsible manner thus find themselves being drawn into a process of rent-extraction to supplement low official salaries and to compensate for lack of resources to effectively run their departments. These arbitrary interventions, delays in issuing licences and work permits and conflicts over employment conditions are at least partly the result of attempts by existing commercial factions and interest groups (many of which have direct links to leading political figures and ex-military leaders) to prevent competition in key sectors of these regional economies – particularly in key strategic sectors such as transport and communications, energy and fuel supply, resource-extraction industries such as mining, forestry and fisheries and some aspects of agro-industrial production. In addition, several cases were noted of investors not being able to effectively implement the benefits granted to them by the Investment Promotion Centre (CPI) under the 29 1993 investment legislation. One area in which there is an inconsistency in current policy and institutional approach concerns payment of IVA (Value Added Tax) on imports of capital equipment to commence new investment projects. Under the Investment Law, approved projects are exempted from IVA for capital equipment and an initial stock of raw materials. However, these exemptions are not being applied consistently by the customs service, Alfandegas, whose current reform mandate is to ensure that customs revenues and IVA on imports are enforced more effectively. These uncertainties are harmful to Mozambique?s investment potential as they give the impression that government is unable to deliver on its commitments to new investors and that the regulatory and legal regimes are discriminatory and arbitrary. 5.2 Urban Land Regulation and Management in Mozambique Land is the most important factor of production and productive asset in Mozambique, as in most other natural-resource based African economies. Land is a key asset for poor people in both urban and rural areas. For this reason, the exercise of effective and equitable control over land, its administration, uses and forms of ownership is an important objective of most states in Africa. In some countries, this process is transparent, predictable and guided by developmental and social objectives (e.g. Botswana); in many other countries, the opposite occurs and land becomes a major source of patronage for elite groups, the cause of civil conflicts (Collier et al 2003) and is used to favour certain groups within society over others e.g. Zimbabwe. There is concern that recent developments in Mozambique may be resulting in the latter rather than the former as a paradigm. A recent major study on land policy and its relationship with growth and poverty reduction (Deininger, World Bank 2003) “recognises that non-market mechanisms for transferring land, such as inheritance, award of public and state lands, and expropriation of land by the state for the broader public good, have historically played a major role in either facilitating or obstructing broad land access and effective land use and that policymakers should take careful account of these processes.” The main question in the case of Mozambique is whether a continued commitment to non-market mechanisms for land transfer, through 50 year renewable leases, is having positive or negative developmental consequences through promoting equitable and efficient land distribution? Our discussion focuses particularly upon urban, rather than rural land, and particularly upon land within the boundaries of the new municipalities in Mozambique. The joint identification of municipalities with urban land management is, however, somewhat of a conceptual error – the majority of municipalities are also responsible for quite substantial areas of rural and undeveloped land surrounding the main urban and peri-urban areas. 30 Box 4 Overview of Mozambican Land Policy and Implementation Problems Source: Tanner (2002) National land policy in Mozambique is in theory oriented and guided by the 1995 National Land Policy and the 1997 Land Law and by the set of regulations which accompany this legislation and determine the forms of its implementation. However, there are growing concerns about the government?s capacity and determination to actually implement some parts of the 1997 legislation and also about its effectiveness in guiding land administration and land use decisions at the local level. Basic principles of 1995 National Land Policy , State ownership of land, as laid down in the constitution , Guaranteed access to land for the population as well as for investors, while promoting social and economic justice in the countryside by recognising the customary rights of access and management of rural people over their land , Guaranteed rights of access to and use of land by women , Promotion of private investment – national and foreign – without prejudicing the resident population and ensuring that both they and the public treasury benefit , The active participation of nationals as partners in private enterprises , The definition and regulation of basic guidelines for the transfer of use rights over land, between citizens or national enterprises, as long as investments have been carried out on the land in question , The sustainable use of natural resources in a way that guarantees the quality of life for present and future generations Regulating Urban Land Use While much of the discussion around the new land law concerned the situation in rural areas, there are a number of issues which are particularly relevant to the current discussion of urban land: , Many land conflicts and related problems are due to the ineffective implementation of the existing laws, and the very weak capacity of the Cadastral services; , Land conflicts are also being caused by the overlapping of responsibilities and actions between a range of public entities, including the cadastral services (DINAGECA), municipal directorates of urbanisation and construction, line ministries - who are all seeking to retain their rights to allocate land rights and concessions; , Traditional or customary land management systems are still functional and in fact are responsible for the vast majority of land access and use issues, including the resolution of conflicts at local level. , The regulations over urban land use, known as the „Regulamentos do Uso do Solo Urbano? have still not been formally approved. An initial version submitted to the Council of Ministers in 2002 was rejected. , The main central government agencies with interests in this process are the Ministry of Public Works and Habitation (MOPH), the Ministry of Agriculture and Rural Development (MADER), to which DINAGECA is a subordinate directorate, the Ministry of Justice, which controls the Registo Predial, the Ministry of Planning and Finance and the Ministry of State Administration. An overview of recent developments in land policy and causes of delays in the implementation of the 1997 Land Law in urban areas are given in Box 4. The delay in 31 approving urban land regulations is holding up important decisions about the clear attributions of functions between the different agencies all wishing to retain their interests in urban land use administration and management. This also affects the ability of more pro-active municipalities to potentially move forward with their own autonomous programmes of land management and administration, in case these are later found to be incompatible with the general urban land regulations. This situation has created a vacuum which has been filled by a range of alternative urban land allocation procedures, mostly based upon practices and policies which were put in place either during the colonial period or in the immediate post-independence period. Also, importantly the role of traditional authorities in determining land use and settling land disputes seems to have been increasing in many peri-urban areas of major towns and cities in Mozambique (Swedesurvey 1999, Jenkins 2001). This directly reflects the inability of state agencies and officials to effectively fulfil their legal responsibilities in the areas of land demarcation, titling and administration. Another direct result of state inertia is that a parallel market in urban land has emerged in Mozambique and is becoming increasingly well organised and profitable for those who control or have access to these informal markets. The incomes being generated from the re-sale and leasing out of these assets are not being taxed in any way and are hence part of a process of accumulation which is outside of the government?s control. Impoverished municipalities are thus standing by and watching while a few wealthy and powerful local families and other individuals get rich by the exploitation of assets which should in reality provide the mainstay of their own financial autonomy. As the Swedesurvey report (1999) on land use, land occupation and legal support to urban land management in Maputo City comments: “There is substantial, short-term, personal interest in allowing the “system” to continue as it is. Anyone with a connection or a position can profit from this system. The general public does not. The fact that the majority of land occupancies are “informal” is indicative of the inaccessability of the current system.” 5.3 Obtaining Land Use Rights (DUAT) in Municipalities Against the background of continuing uncertainty over national policies on land management, current procedures for obtaining concessions and land titles for urban land plots does not seem to be uniform, even within specific cities and towns. With the establishment of municipalities in 1998, the different agencies and services are having to restructure themselves in order to separate the functions belonging to the central government agencies (DINAGECA, Registo Predial, APIE) and those for which the municipalities have autonomous responsibility. 32 Most municipalities have established a Directorate/ Service for Urbanisation and Construction (DCU) which is, amongst other functions, responsible for receiving and processing requests (pedidos) for the attribution of land titles, undertaking plot demarcation, as well as subsequently evaluating construction projects and issuing contruction licenses. A typical process is shown in Box 5 for Vilanculos municipality. Box 5 Land Acquisition in Vilanculos , Number of licences for “Direitos de Uso e Aproveitamento de Terros” (DUAT) issued in 2003 (Jan-March): habitation 204, commerce 5, tourism 0, services 2, agriculture & livestock 2. Main demand is usually for land plots for house building. , Documents required: a) Request (requerimento) submitted to President of Municipal Council – A4 paper or 25 line paper authenticated by the Municipal Council b) Request submitted to Governor of Inhambane Province c) 3 photocopies of identity documents, one authenticated d) Plan of topographic location of land for which concession of DUAT requested e) Declaration of the Secretary of the Bairro where the land concession is sought confirming that the land is currently unoccupied , Once all documentation has been submitted, organising the process takes 2 days; the request is then reviewed by the urbanisation section of the Municipal Council who send their opinion to the President for his decision. , This process can take as little as 10 days for simple and non-controversial requests. If the land requirement is very large, the process may be delayed. , Private sector representatives interviewed did not mention difficulties in access to land as one of their major preoccupations. The types of requests that the DCU?s typically have to deal with include: , Applications which do not specify a particular plot of land – in this case, having an expansion zone which contains already demarcated plots of land and basic infrastructures will facilitate the ability of municipalities to respond to such requests; , Applications where a specific plot of land is identified – in this case the main problem will commonly be the lack of an adequate archive and register system which would provide the needed public information on each plot of land and its current status (whether title has already been attributed, to who, how much time remains on the concession, have current title holders fulfilled the requirements of the concession by developing the plot etc.) , Applications where the land is already occupied and the occupant wants to regularise their right of occupancy – this is potentially an area which could generate great demands upon municipal capacity, given that evidence suggests that most urban dwellers lack 33 formal documentation to establish their land occupancy rights; in many cases, land may have been originally attributed by the Distritos Urbanos or the Secretarios dos Bairros in ways which the DCU considers to be illegal. The issue of land titles and access to urban land for commercial and industrial purposes seems to be more problematic in large cities, such as Maputo, Beira, Nampula and Quelimane, than in smaller cities and towns. This can be partly explained by a complex history of overlapping land claims dating back in some cases to the colonial period in major urban centres. It is also a question of higher demand levels and a relative lack of capacity of land planning departments in larger cities to process the flow of land claims. Some of the better organised and resourced municipalities (Nacala, Pemba, Vilanculos) have (i) invested in urban planning capacity, (ii) seen the development or updating of existing urban plans as a priority, (iii) defined clearly zones suitable for commercial and industrial development, (iv) developed clear procedures for submitting and processing land title applications (see Box 5 above), (v) follow established time limits for decisions to be taken and (vi) have proactively identified “expansion zones” for new residential development with demarcated plots and basic infrastructural services provided. Some of the actions that municipalities and their development partners should seek to undertake if they wish to promote more transparent and efficient allocations of available land for economic development, while also protecting the tenure of existing urban and peri-urban communities, include: , Undertake a census of property registrations within the municipality; , Identify plots that are available for commercial and/ or industrial development; , Support populations in peri-urban and semi-rural areas to obtain formal land titles, ether on an individual basis or collectively as communities; , Publish details about procedures for obtaining land for different types of land users; , Implement differential leasehold rates for properties of different sizes (to discourage land claims that will not be developed); , Define “expansion zones” for residential occupation in suitable areas; demarcate plots and lease these on the basis of a set of requirements – including giving preference to people requesting plots who do not have other properties within the municipality. 5.4 Other Regulatory Issues Another area in which firms in Quelimane and Tete City complained about municipal regulation is in obtaining permits and licences for new construction projects, or the 34 rehabilitation of existing infrastructures (see Harding 2002). These problems often arise during the project inspection stage, with substantial fines being levied for not complying with appropriate building regulations. Many of these problems seem to result from uneven and non-transparent implementation of regulations, rather than from any inherent weakness in the 10regulations themselves. Firms interviewed complained about the need to provide “incentive payments” to officials in order to obtain favourable decisions and to get inspections undertaken on time (including providing lifts and other inducements to municipal staff to attend their project sites). In Vilanculos, according to the municipal authorities, the construction licensing process typically takes 15 days, although this depends upon the time taken by the person requesting the licence to submit all documentation. The municipality employs a number of fiscais (who have a background in civil engineering) to supervise construction projects; it was not possible to ascertain the exact practices used, but this was not mentioned by private sector representatives as an area of particular concern. There is no established procedure for appeals against fines imposed by Municipal Council officials. However, current requirements for construction project licensing are certainly too complex and costly for the majority of ordinary municipal citizens to be able to comply with. The existing regulations are largely based upon the old Portuguese construction codes which were designed to regulate only construction in the “white”, urban areas of cities and towns. They require the submission of detailed architectural plans, commissioning of a registered civil engineering company to undertake the work and the following of complex requirements with regard to the types of construction materials to be used, size of rooms and facilities to be provided etc. The result is that the majority of housing construction in suburban areas of cities is undertaken without licensing or effective supervision or control. In response to this situation, we believe that municipalities should seek to move from a position of seeking solely to “regulate” urban and peri-urban construction to one of incentivising and educating local populations in improved construction methods and relevant health and safety requirements for housing construction. This can be achieved through public dissemination campaigns, the construction of “model” low cost housing projects in bairros, subsidising the installation of improved chemical lavatories, water supply systems etc. In several coastal cities (Vilanculos, Nacala, Pemba) there is also particular concern about unlicensed construction in environmentally sensitive areas along the coastline and problems with erosion caused by over-population of the litoral zones. As suggested in Section 4 above, one of the most effective ways of combating such practices would be through a system of 10 Comment in interview with José Forjaz, former Director of the National Institute of Physical Planning and Director of the Faculty of Architecture at UEM. 35 land pricing and property-based municipal taxation which ensured that the private costs of utilising these resources were brought into line with the social costs. 36 6. Service Delivery by Non-State Agents – Can it Work in Mozambique? 6.1 Service Delivery Challenges Some of the core services which typically fall under the responsibility of municipal councils are (a) urban water supply, (b) the provision and maintenance of effective liquid waste treatment and sanitation services and (c) the collection and disposal of solid waste from households and businesses, amongst others. Such services are crucial to public health, public hygiene and improving the general quality of urban living. They are also an important factor in promoting local economic development, by providing the kind of urban conditions which both influence business location decisions and also support the growth of a local employment pool of semi-skilled and skilled labour. In many countries, municipal authorities are increasingly looking to the private sector and also to other non-state agencies (such as community associations, religious groups and NGO?s) to participate in the more effective and equitable delivery of these services to urban households. This form of arrangement has come to be known generically as “public/ private partnerships” or PPP?s. The PPP originated in high-income countries with strong institutional capacity, extensive service networks and infrastructure, a mature private sector which had proven its efficiency and management capacity, and appropriate and enforceable regulatory frameworks. The question is whether this model is appropriate in low-income countries such as Mozambique, often characterised by chronically weak public institutions, deteriorating infrastructure limited to core urban areas, an immature and unproven formal private sector, low rates of cost recovery and a weak regulatory environment? Effective service delivery (of water, sanitation, waste collection and energy) in low-income countries is a significant challenge. In many instances, municipalities are faced with tackling massive service extension and service upgrade requirements, often in informal settlements on marginal land and addressing the needs of customers with limited access to formal systems and reliant on alternative delivery mechanisms. Clarke & Wallsten (2002) provide an overview of the extent of the challenge in providing some basic infrastructure services to rural and poor urban consumers in Africa (Figure 6.1). As can be seen from the following figures, using data drawn primarily from nationally representative household surveys, current levels of access to these services are extremely low in many African countries. In many parts of Africa, access to electricity, piped water, telephones and improved sanitation are luxuries enjoyed by the few, rather than common public services enjoyed by the many. 37 Figure 6.1: Comparisons of Infrastructure Provision in Mozambique and Selected African Countries % of households with access to electricity 100.0% 90.0%80.0% 70.0% 60.0%Urban50.0% Rural40.0% 30.0%20.0% 10.0% 0.0% Mozambique Tanzania Uganda% of households with access to piped water 100.0% Zambia 90.0% 80.0%Kenya 70.0%Senegal60.0% Urban50.0% Ghana40.0%Rural 30.0%Nigeria 20.0% 10.0% Zimbabwe0.0% Uganda Mozambique Nigeria Ghana% of households with access to flush toilet Zambia 100.0% Tanzania80.0% 60.0%KenyaUrban 40.0%RuralSenegal 20.0% Zimbabwe0.0% Tanzania Uganda Mozambique GhanaSource: Clarke and Wallsten (2002) based upon data from various national household surveys, including Mozambique IAF 1997. Senegal Nigeria Kenya 38 Zambia Zimbabwe From Figure 6.1, it can be seen that the „infrastructural deficit? in urban areas in Mozambique is particularly large even by regional standards. Responsibility for increasing access to these services falls within the remit of municipalities, although responsibility for the 11actual provision of services in many cases falls to other agencies. What roles can local governments play in seeking to overcome these huge infrastructural deficits? Should they seek to be the direct providers of services or rather adopt a more regulatory role and allow other market agents to provide services in response to demand. The existence of externalities to public infrastructure provision signifies that the socially optimal amount will typically be higher than the demand from individual households. There is also the legacy of past commitments by governments and donor agencies to provide universal access to such services. Rational consumers are unlikely to invest in acquiring goods and services which they believe could or should be provided to them free of charge by the state or by other agencies e.g. NGO?s. 6.2 Experiences of Contracting Out of Services in Mozambique Early experiences in the contracting out of core public services in the municipalities visited have not been particularly successful. A typical example is the experience of Pemba with the contracting out of solid waste collection services (see Box 6 below). Box 6 Waste Collection in Pemba , In February 2001, the Pemba Municipal Council signed two contracts with a Maputo- based company, Quimilar, for the exclusive rights to the collection, transport and disposal of solid waste from both domestic households and commercial and public sector premises. , The first contract was for the leasing of municipal properties and equipment. The company was required to pay a bimonthly leasing fee of 25 million Mt (approximately US$ 1200) to the Municipal Council for the use of their offices and workshops and another 35 million Mt monthly (US$1700) for the leasing of equipment, mainly lorries and tractors. This contract was on a one-year renewable basis and the municipality reserved the right to alter the rental payment annually. , The second contract covered service delivery, including the installation of waste collection containers at strategic points throughout the municipality. The contract was signed for a period of 15 years renewable. The company was theoretically responsible for domestic waste collection three times per week. 11 For example, electricity supply in Mozambique is currently the responsibility of the monopoly state-owned electricity supply company Electricidade de Moçambique. 39 , Under the contract, Quimilar were able to retain 80% of the revenues generated from waste collection fees, with the Municipal Council receiving the remaining 20%. Fees were collected by EDM through their integration with electricity bills, with EDM retaining 10% of total revenues collected for this service. , The right to set the service fee schedule was retained by the Municipal Council and subject to revision on an annual basis, primarily to take account of inflation. The company was given the right to negotiate its fees with industrial users only, based upon quantity of material involved. This limited the company?s ability to set fees which actually responded to the costs of service delivery to different areas and types of customers. Initially, the following schedule was mandated (monthly fees): Domestic users (urban areas) 20,000 Mt Domestic users (peri-urban areas) 10,000 Mt Shops and kiosks 500,000 Mt Hospitals & Health Centres 1,500,000 Mt Supermarkets 1,700,000 Mt Restaurants & Similar 2,000,000 Mt , The contract was operational for less than one year, after which the company stopped providing the services and their local representatives left Pemba. It was not possible to find out from the company their reasons for the interruption of service provision, however contributing factors seem to have included lower than anticipated levels of revenue generation and the high costs of leasing and maintenance of outdated equipment. The municipality also complained about poor coverage of services in outlying bairros and a “lack of experience and honesty” on the part of the company. , To this should also be added the lack of experience on the part of the municipal officials in managing commercial contracts, especially the high fixed costs charged for the leasing of equipment (which severely compromised the company?s cash-flow position and profitability levels), as well as over-ambitious expectations about service delivery levels in the initial stages of contract implementation. One of the main lessons from such experiences is that building municipal capacity for entering into any form of public/private partnership arrangement is crucial. Good policy can be undermined by a failure to negotiate and enforce effective contracts (e.g. see also the examples of recent attempts to establish contracts with private companies such as Interwaste and Neoquimica for solid waste collection in Maputo City). Another issue is that cost recovery rates in poorer neighbourhoods are likely to be quite low and hence services in these areas may need to be subsidised either directly by the municipality or indirectly in the overall tariff structure. The stage of negotiating the contract is crucial – confidence can be generated by a well- designed contact that clearly lays out the roles and responsibilities of each party, and also 40 12undermined by a weak contract. It is essential to define clearly what are operational and maintenance expenses and what are capital investments if responsibility is to be split between municipality and private contractor for these costs. Structural problems in the contract are often created by an imbalance in capacity. Capacity can also be severely affected by a change in key municipal officials following an election. This is an area in which external agencies can play a crucial supporting role, allowing municipal officials access to the necessary legal and commercial expertise they need in order to be able to negotiate and manage effective service delivery contracts. Exposure to experiences in other cities in countries facing similar types of development challenges is also important in building local capacity. 6.3 Constraints to commercial delivery of public services It is probably too early to consider the contracting out of basic municipal service delivery in many municipalities due to (a) lack of technical capacity to manage such decentralised service delivery options, (b) the high risks of contractual default leading to a complete collapse of service delivery and (c) uncertainty of the commercial viability of these contracts meaning that serious private sector investors will not participate in tenders. Existing constraints include that: a) The size of contracts and potential revenue streams in smaller municipalities would be too small to attract serious (regional, international) investors; b) The local private sector companies are immature, lack technical capacity and experience and also in some cases professional competency and honesty; c) Several negative experiences of attempts to contract out rubbish collection in Maputo, Beira and Pemba have made municipalities risk-averse; d) Revenue streams and hence profit levels are uncertain due to current lack of coverage of services (e.g. water supply and sanitation) and the high levels of capital investment 13required to increase coverage, low levels of per capita income, the lack of a culture of having to pay for basic public services; e) As an example, in Vilanculos, communities in some bairros which were recently electrified assumed that after a one-off payment for connection to the electricity grid that the subsequent supply of electricity would be free (like the water supply); 12 See also J. Plummer (2000), “Favourable Policy and Forgotten Contracts: Private Sector Participation in Water and Sanitation Services in Stutterheim, South Africa”, Working Paper 442/01, Birmingham University, UK. 13 It is almost inevitable that further investment in extension of these services will require some degree of public subsidy to initial capital development costs in order to render these projects commercially viable and hence attractive to private companies. The likely degree of cost-sharing can be established through detailed economic and commercial feasibility studies. 41 f) Legal institutions outside of Maputo are extremely weak and contract enforcement is costly, time consuming and the results are highly uncertain (different courts and judges give contradictory opinions on the same issues; a common view is that you can usually “purchase” a judgement in your favour). 6.4 Solutions and Alternative Approaches Possible solutions include that municipalities should consider the launching of joint tenders/ contracts involving supply of goods and services to all municipalities within a region in order to increase the size of the overall revenues and hence attract larger, more experienced and technically competent private sector partners. There is also need for further work on the legal/ regulatory aspects of contracting out of municipal service delivery based upon best practice experiences from other countries; donors supporting municipal development should also consider making further legal and technical support available to municipalities who wish to explore alternative service delivery options. In contrast to the problems experienced in contracting out of core municipal service delivery to the private sector, there have however been some examples of positive experiences of co-participation between municipalities and other non-state agencies (including private companies, community associations and NGO?s) in other aspects of improving municipal infrastructures and services. We encounteresd several examples of municipal assets, buildings and facilities being leased out to private companies and generating additional revenues to the municipality from the effective use of these assets e.g. renting out of beach houses in Pemba, private management of parks and gardens, private management of abbatoirs. There are also many examples of local citizens and companies participating in the costs and construction of new municipal facilities, including schools, health posts, sports facilities, road construction. Although it is relatively early in the development phase of many municipalities, there is a need to reorient the attitudes of municipal leaders to one of co-participation, rather than always assuming that direct state service provision is the optimal model. Nacala municipality, in particular, gives an example of the potential “virtuous circle” of improving municipal services and infrastructure stimulating further investment and business development which in turn provides an expanding source of revenues for further public investments. One of the most important lessons of Nacala?s experience from 1998-2003 is that the Municipal Council perceived its role as one of “promoting co-participation with other local agencies” in order to fulfil its mandate of promoting local socio-economic development and improving the urban environment through better infrastuctures and more effective public 42 services. Nacala provides an example of where a committed and competent municipal leadership can take advantage of an existing local economic base in order to realise the objective of promoting financial autonomy and making public service delivery more responsive to local needs. 43 7. Conclusions In examining the role that city governments can have in influencing conditions for economic growth and development, Vidler (1999) argues that it is useful to think in terms of a set of minimal requirements – focusing upon autonomy, resources, jurisdiction and capacity – which these institutions require in order to exploit existing opportunities and respond creatively to new challenges. Although rates of development and potential for economic growth are partly determined by both prior conditions and national policies, international experience has shown that there is considerable scope for individual city administrations to make a significant difference. This paper has looked at several aspects of the challenge that municipalities face in seeking to create an appropriate enabling environment for private sector-led local economic development, based upon the experience of four medium-sized towns in the centre and northern regions of Mozambique (namely Vilanculos, Nacala, Cuamba and Pemba). The paper has examined the current degree of autonomy of municipalities, the resources at their disposal, their respective areas of jurisdiction and the capacity they have to effectively implement their mandate. We argue that the advent of municipalisation has already begun to have some definite positive economic affects, in terms of attracting higher investment levels to municipal compared to non-municipalised locations, improving delivery of some urban services and increasing levels of popular participation in identifying local solutions to local economic and social development problems. These effects are particularly noticable in smaller cities and towns, such as those visited, and it is interesting to note that evaluations of municipal performance (e.g. MAE 2002) demonstrate the relative success of smaller municipalities during their first mandate from 1998-2003. However, municipalities continue to be constrained in their ability to deliver effective services by extremely low resource levels, both in terms of financial and human resources. We have examined the current basis for municipal financing and have argued that the current package of municipal taxes is failing to meet its objectives. We argue for the consolidation of multiple taxes, which are confusing and costly to implement, into a single municipal tax which should be based upon property ownership and occupation, with exemptions for low-income households. We also argue for considerably enhanced levels of central government financial transfers, which have remained below legislated levels throughout this period, and a stronger political commitment to effective decentralisation with a clear timetable and criteria established for the creation of further municipalities. In the area of regulatory burden, we observe that the main issue of concern to the private sector in Mozambique which currently comes under the direct responsibility of 44 municipalities is granting access to urban land for commercial and industrial development. Several municipalities have begun to pro-actively address problems of land access through the development of zoning plans and focusing of integrated infrastructure development (roads, water, energy, telecoms) into new expansion zones. There are still however serious concerns about the transparency (and in some cases, legality) of these transactions. One crucial measure is the undertaking and publication of a municipal census of property ownership and registrations, although there has been already significant political opposition to making property ownership and property transactions more transparent in cities where this has been attempted. We examined experiences with the contracting out of services to the private sector and other non-state agents and found that past experiences of failed contracts have made many municipalities risk-averse. There are also several constraints to the widespread adoption of such procedures, including limited contract size and revenue streams, difficulty in attracting serious reputable companies (particularly regional or international investors), weak legal institutions and contract enforcement and a lack of culture of having to pay for basic public services amongst consumers. This is an area that will require further technical support, particularly for the design and implementation of effective service delivery contracts. We were encouraged by the degree of dedication and commitment shown by municipal officials in all of the municipalities visited for this study, and also by the innovative ways in which the mayors and other municipal officials are approaching their tasks, in many cases beginning to challenge other state agencies and assert their own autonomy and independence. Several of these municipalities have also succeeded in establishing a positive working relationship with the local business sector; this is particularly evidenced by the wide range of examples of business involvement in financing the costs of municipal investments in new infrastucture and facilities e.g. schools and water supply systems. The willingness of the business sector to pay municipal taxation and participate actively in municipal development is contingent upon two factors (a) a belief in the competence of the Municipal Council and evidence that service levels are being improved, (b) willingness by the Municipal Council to undertake open consultation with representatives of the business sector on strategic direction and in critically examining the design and implementation of new taxes and regulations. 45 Bibliography Biggs, Tyler, John Nasir and Ray Fisman (1999), “Structure and Performance of Manufacturing in Mozambique”, RPED Country Studies Series, World Bank, Washington, D.C. Clarke, George and Scott Wallsten (2002), “Universal(ly Bad) Service: Providing Infrastructure Services to Rural and Poor Urban Consumers”, Policy Research Working Paper 2868, July 2002, World Bank, Washington, D.C. Collier, Paul, Anke Hoeffler, Lance Elliot, Harvard Hegre, Marta Reynal-Querol and Nicholas Sambanis, (2003), “Breaking the Conflict Trap: Civil War and Development Policy”, Oxford University Press, Oxford. Crook, Richard (2001), “Decentralisation and Poverty Reduction in Africa: The Politics of Local-Central Relations”, mimeo, Institute of Development Studies, University of Sussex. Datt, G., K. Simler, S. Mukherjee and G. Dava (2000), “Determinants of Poverty in Mozambique 1996-97”, Washington, D.C., International Food Policy Research Institute (IFPRI). Deininger, Klaus (2003), “Land Policies for Growth and Poverty Reduction”, Oxford University Press and World Bank Co-publication, Oxford. Devas, Nick ed. (2001), “Urban Governance and Poverty: Lessons from a Study of Ten Cities in the South”, Policy Briefing Paper, University of Birmingham, June 2001. () FIAS (2001), “Removing Administrative Barriers to Investment in Mozambique - Second Red Tape Analysis”, Foreign Investment Advisory Service, World Bank/ IFC, Washington, D.C., Government of Mozambique (1998), “Understanding Poverty and Well-Being in Mozambique: The First National Assessment (1996-97)”, Maputo, Ministry of Planning & Finance, Universidade Eduardo Mondlane and International Food Policy Research Institute. Hanlon, Joseph (1997), “Guia Básico Sobre as Autarquias Locais” (Basic Guide to Elected Local Governments), AWEPA/ MAE Report, Maputo. Harding, Alan (2000), “Development of the Private Sector in Sofala Province: Opportunities, Constraints and Scope for Policy Intervention”, Report for GTZ, Background Paper to the Sofala Province Strategic Development Plan 2000-2005, Mozambique, November 2000. Harding, Alan (2002), “Role of Municipalities in Business Development in Mozambique”, Report for UNIDO?s Investment Promotion and Institutional Capacity-Building Division, Vienna. 46 Harding, Alan and Cesar Calvo (2003), “Mozambican Manufacturing in a Regional Perspective: Selected Issues & Results from the 2002 Manufacturing Enterprise Survey”, mimeo, Centre for the Study of African Economies, April 2003. Jenkins (2001), “Emerging Urban Residential Land Markets in Post-socialist Mozambique: the Impact on the Poor and Alternatives to Improve Land Access and Urban Development”, Research Paper No. 75, ECA School of Planning and Housing, Heriot- Watt University, February 2001. Ministry of State Administration (2002), “Balanço de Quatro Anos de Funcionamento dos 33 Municípios”, Maputo, September 2002. Mitchinson, Robin (2003), “Devolution in Uganda: An Experiment in Local Service Delivery”, Public Administration and Development, Vol. 23, pp. 241-248. Nasir, John, Manju Shah, Chad Leechor, Pradeep Srivastava, Alan Harding, Ibrahim Elbadawi and Vijaya Ramachandran (2003), “Mozambique: Industrial Performance and Investment Climate”, Regional Program on Enterprise Development (RPED) Report, Africa Private Sector Group, World Bank, Washington, D.C. Plummer, J (2000), “Favourable Policy and Forgotten Contracts: Private Sector Participation in Water and Sanitation Services in Stutterheim, South Africa”, Working Paper 442/01, Birmingham University, UK. Swedesurvey (1999), “Comparative Study of Real and Documented Land Use and Land Occupation and Legal Support to Urban Land Management, Volume 1 – Evaluation of Existing Situation”, Cadastre Pilot Project, DCU Maputo Municipality, January 1999. Tanner, Chris (2002), “Law-Making in an African Context: The 1997 Mozambican Land Law”, FAO Legal Papers Online No. 26, Food and Agriculture Organisation, Rome. Vidler, Elizabeth (1999), “City Economic Growth”, Urban Governance, Partnership and Poverty Theme Paper 1, International Development Department, School of Public Policy, University of Birmingham, March 1999. 47 Annex 1 Distinguishing Features of a Municipal Success Story Case Study of Nacala Municipality 1998-2003 1. Role of the opposition in giving greater legitimacy to the Municipal Council and focusing municipal efforts in improving socio-economic conditions A local citizens group (OCINA) put forward candidates for the 1998 elections after Renamo?s withdrawal and succeeded in gaining 11 out of 39 seats in the Municipal Assembly. The leader of the OCINA group was invited by the winning Frelimo mayoral candidate to become part of the municipal executive and is currently the vereador for agriculture and rural issues. Nacala is thus the only example of a municipality with a power-sharing executive in Mozambique and the only municipality apart from Maputo City with any opposition participation in the municipal legislature. The local initiative to form a power-sharing administration was strongly resisted by the Frelimo Party?s central administration and particularly by then General Secretary, Manuel Tome. However, it is recognised by Frelimo members of the municipal administration to have contributed to the municipalities success by giving a greater sense of legitimacy and representativeness to the council (which was completely lacking from the previous pre-1998 appointed Executive Council) and hence by forming the basis for the “inclusive and participative” form of government which the Municipal Council has subsequently pursued. Another important factor is that the presence of opposition members in the Municipal Assembly seems to have also given a greater discipline to the members of the executive branch – both in ensuring that new policy initiatives are subjected to an open consultative process before submission to the MA for formal approval and also in ensuring that the MC is focused upon fulfilling its campaign manifesto and other policy commitments. 2. Effective Use of Local Human Resources and Technical Capacity Due to the existence of Nacala Port and railway, which has served as the northern headquarters for CFM for many years and a number of other transport & communications related service sectors, Nacala has a relatively strong human resource base, particularly in areas such as civil engineering, urban planning and construction. The Municipal Council appears to have been particularly successful in taking advantage of local technical and project management skills in the development of its programme. A strong financial basis has meant that the municipality has been able to employ a number of people with medium-grade technical skills in areas such as urban planning, cadastral services, land demarcation, habitation and water and sanitation. A coherent human resource development programme has been developed with both in-service training and 48 formal external training programmes for municipal officials. With the encouragement of donors supporting other municipalities in the north and centre of Mozambique (Swiss Cooperation, GTZ), Nacala Municipality has begun to “export” its technical skills and experience by providing services and training to officials from other municipalities e.g. by hosting regional training workshops on land planning in Nacala. The Municipal Council?s own internal capacity has also been strengthened by judicious use of contracted external technical assistance, paid for from the municipality?s own budgetary resources e.g. for the revision of the Nacala Master Plan. This has ensured that external consultants respond directly to municipal priorities (rather than those of donors) and, by the use of locally-based consultants, has ensured continuity from feasibility study to implementational phases of programmes and projects. 3. Exploitation of Alternative Sources of Municipal Revenues Another factor which distinguishes the Nacala experience has been their success in the implementation of a selected number of the new municipal taxes, as well as their innovative approach to seeking cost-sharing arrangements with other third parties (including private companies, local NGO?s and private individuals) to finance development projects and programmes. Examples include the rehabilitation of the local hospital, financing of the municipal radio and television stations and several road construction projects The “Taxa de Actividade Economico” now represents the second most important source of municipal own-resource funding after fees for land titles and leasing. This is based upon a banded system where all businesses are allocated to bands based upon the physical dimensions of the space their premises occupy. There is thus a progressive element to the tax – larger companies pay higher rates. Informal sector enterprises excluded? Small-scale commerce pays municipal market fees. 4. Revision of the Urban Master Plan – an example of local initiative and self-sufficiency The Terms of Reference for the Revision of the Municipal Master Plan (Plano Director) were drawn up in July 2001 by the Núcleo para Revisão do Plano Director within the Municipal Council headed by Arquitecta Liana Battino. The original master plan for Nacala had been developed by INPF and approved in 1985 during the years of civil war when the primary concern was the physical security of the city, as well as the threat to the urban environment due to over-population of vulnerable coastal areas by populations who migrated to the city from surrounding rural areas in order to seek refuge from the conflict. The combination of these factors resulted in a situation where the city faced chronic problems from erosion and inadequate water supply and sanitation capacity. The 1985 Plan recommended the phased removal of populations from the vulnerable coastal 49 areas and resettlement into urban expansion zones on higher ground away from the coast. The 1985 Plan was the main physical planning document which underpinned the Nacala Integrated Project 1990-98, which was implemented with mixed results by the Nacala City Executive Council, prior to municipal elections. In reality, little impact was achieved on the key issue of relocating the peri-urban population away from areas which were not suitable for intensive habitation. This was a task left to the incoming municipal administration to resolve. It was thus recognised that there was a need for a fundamental review and possible revision of the existing Master Plan in the light of the new post-conflict conditions and also taking account of a changing economic and human resource base in the municipality. For this purpose, the Municipal Council launched in 1999/ 2000 an extensive process of consultation including both focused technical seminars with local experts in specific fields and also interviews with local personalities and representatives of a range of local organisations, including community groups, traditional leaders and religious leaders. Some success has already been achieved in a campaign of preventative measures against further erosion, including protective infrastructures, tree planting programme, rehousing programme and creation of expansion zones which allow families opportunities for relocation to serviced plots. These expansion zones still lack some basic services, including adequate transport and piped water. 5. Strategies for Co-participation with Private Sector and Civil Society Nacala municipality recognised that in order to effectively fulfil its mandate it would need to seek the participation of other stakeholders in the local community. The Municipal Five-Year Plan for 1999-2003 explicitly recognises that the Municipal Council will play a co-ordinating role in some areas of municipal development, rather than being the direct service provider. This has been successful in generating a sense of local “ownership” of the development programme. This has been supported by efforts to undertake widespread consultation on key policy decisions and also by a strong dissemination campaign, based around the municipal radio and TV channels. 50 Annex 2: Matrix of Issues Research Project on Municipalities & Local Economic Development Cooperação Suiça – Programa de Apoio á Descentralização e Municipalização (PADEM) – Moz 54 Matrix on Information Requirements at Municipal Level (Municipalities of Vilanculos, Nampula, Nacala, Cuamba and Pemba) Main Topics Types of Information Required Sources/ Responsible A. Municipal Structures A1. Municipal Council structure – no. vereacoes, areas of activity, President, MC number of employees (current 2003) President, MA A2. Municipal Assembly structure – no. members, committees, MAE – DNDA frequency of sessions, public participation? MAE – DNDL A3. Sub-municipal administrative structures? (e.g. in bairros) A4. Relationship with district administration (formal/ informal) A5. Transparency & governance issues – examples of popular [Responsible: Alan Harding] involvement in municipal planning, access to information A6. Are the following documents publicly available: - annual budget (orçamento annual) - development plan (plano de desenvolvimento) - plan of land use (plano de ordenamento do território) - staffing plan (quadro de pessoal) B. Municipal Taxes B1. Which taxes are collected by municipality? (see list below) President, MC B2. Methods of tax collection Vereador – financial issues B3. Involvement of DPPF/ DNIA in municipal tax collection? DPPF/ DNIA B4. Current Tax rates – how established URTI, Maputo B5. Tax coverage – proportion of target population B6. Total Revenues – Actual vs Potential (2001, 2002) [Responsible: Eduardo Nguenha] Municipal poll tax (Imposto Pessoal Autárquico) Municipal Property Tax (Imposto Predial Autárquico) Economic Activity Tax (Taxa por actividade económico) Municipal Tax on Industry & Commerce – Section C Income Tax – Section B (Imposto sobre Rendimentos de Trabalho) C. Other Municipal Revenues C1. Non-tax local revenues – market licence fees, other fees & licences President, MC C2. Central Government Transfers (see below) Vereador – financial issues C3. Funds received from external donor agencies e.g. World Bank – DPPF/ DNIA Municipal Development Fund, UNDP/ UNCDF, others URTI, Maputo C4. Municipal loans contracted? [Responsible: Eduardo Nguenha] Municipal Compensation Fund (Fundo de Compensação Autarquica) Local Investment Fund (Fundo de Investimento de Iniciativa Local) APIE Receipts – 15% total Vehicle Tax – share of total receipts D. Urban Service Delivery D1. What services are currently delivered by the municipality? (see President, MC indicative list below)? Vereadors/ municipal officials D2. Proportion of total expenditure in each service area (2000-2002)? Private companies D3. Proportion of total municipal employment in each area (current NGO?s/ donor agencies supporting service delivery 2003)? D4. Any examples of private sector participation in provision of these services (see options below)? [Responsible: Alan Harding] Main Service Areas: Urban infrastructures, Sewage & sanitation systems, Water supply, Rubbish Collection, Street cleaning, Municipal market provision & regulation, Gardens & parks, Abattoirs, Passenger Transport, Municipal police, Other services? Potential types of private sector participation (PSP): - service contracts for limited services e.g. meter reading for water meters - management contracts for entire service e.g. rubbish collection - leasing out of properties or systems e.g. water supply - build, own, operate, transfer (BOOT) e.g. for construction of new sewage treatment plants - concessions (giving concession holder monopoly supply rights for defined period) 52 - total privatisation/ divestiture e.g. municipal properties E. Licences & Regulatory Procedures E1. Main licences & service fees President, MC E2. Procedures for issuance of construction licences/ approval of Vereadors/ municipal officials working in areas of land construction projects (new vs rehabilitation) – time taken, documents use, construction and commercial licensing required, costs involved MOPH, Provincial Directorates E3. Procedures for inspection of construction projects – appeal DINAGECA, Provincial Directorates mechanisms against fines MIC, Provincial Directorates E4. Procedures for obtaining access to municipal land for residential, Balcão Unico? commercial and industrial purposes E5. Costs of obtaining land licences – financial & time taken E6. Procedures for collection of market fees & other fees for informal commercial activities E7. Procedures for licencing/ authorisation for informal business activities with/ without fixed premises F. Economic Profile F1. Size of municipality – total population, % economically active INE publications F2. Municipal population – age structure (% under 16) Population Census F3. Poverty profile (from IAF 1997) Reports from MPF on results of IAF F4. Main economic activities – by sector UNDP district profiles F5. Tax base – IVA revenues on locally registered enterprises (source: DPPF) G. Private Sector Profile G1. Business association membership INE G2. No. registered establishments (from INE) CPI G3. Large investment projects Business Associations (CTA, local) G4. Foreign investors (projects registered with CPI) H. Investment Profile H1. Record of major recent private investments in municipality CPI H2. Existing linkages large & small scale enterprises PODE? H3. Sources of investment financing Local banks & financial institutions H4. Available business support services (legal, accounting, Local consultancy firms communications, import/ export facilitation, business registration etc) NGO?s 53 I. Employment Profile Types & scale of employment: INE – census results I1. Formal sector waged Min. of Labour? I2. Informal sector waged I3. Informal sector unwaged (self-employment) I4. Any evidence of significant remittances from employment outside municipality? 54