Provincial cash – grabbing local money

By Professor Willie Mendis
Senior Professor of Town and Country Planning, University of Moratuwa

The Finance Commission of Sri Lanka must be congratulated for the release of its first-ever Annual Report.

Although nearly two decades have passed since the enactment of the 13th Amendment to the Constitution followed by elections to the Provincial Councils, the system of fiscal devolution took effect only from 1990 onwards. Nevertheless, the public were in the dark on the work of the Finance Commission which had been tasked with fiscal devolution, until the release of its Annual Report – 2004.It was an eye-opener to the complexities of “fiscal devolution”, and more importantly on how the Commission made recommendations thereon to the President regarding the principles on which funds from the Annual Budget granted by the government for the use of the Provinces should be apportioned between the various Provinces.

It is important to note that the Finance Commission is a creation of the 13th Amendment to the Constitution. It is on the basis of its recommendations, and on the consultations with it, that the government shall allocate from its Annual Budget, such funds as are adequate for the purpose of meeting the needs of the Provinces. In this connection, the Constitution has obligated the Commission to take into account the objective of achieving balanced regional development in the country. Two key factors here have been the need to progressively, reduce social and economic disparities, and to reduce the difference between the per capita income of each Province and the highest per capita income among the Provinces.

In these circumstances, the Finance Commission has become pivotal to complement the mandates of the Provincial Councils elected to administer the affairs of each of the Provinces.

Financial transfers

The latter has included the supervision of the administration of Local Authorities established by law.

The making of Local Government a provincial subject has therefore led the Commission to conclude in it’s Annual Report that “in the absence of specific provision in the Constitutional Amendment, the financing of Local Authorities was subsumed under the scope of the subject of Local Government”. Consequently, it had precipitated the Commission to determine that all financial transfers to Local Authorities would be channeled through the Provincial Councils, and assessed as an item of the “needs of the Provinces”. It therefore followed that it became an aspect of the duties of the Finance Commission as noted by it in its Annual Report.

The aforesaid had the distinct advantage of the financing of Local Government being included in the Annual Report of the Finance Commission. It however did not provide a basis under which the “needs of Local Authorities” converged within the umbrella of the “needs of the Provinces”.

The implications of the latter is significant as the functions of Local Authorities are specified under the laws which have established them, and not in the Constitutional Amendment. It is compounded by the guarantee in the latter that Local Authorities will have the powers vested in them under its existing laws, with it being open to a Provincial Council to confer additional powers but not to take away their powers.

Revenue
Be that as it may, the Annual Report has however blown open an issue of massive proportions affecting the Local Authorities. It found that two sources of assigned revenue which were levied and collected by the Provincial Councils for transfer to the Local Authorities have not been fully effected. These two sources comprise the Stamp Duty and Court Fines levied by the Land Registration offices and Courts respectively, and paid to the corresponding Provincial Councils. The latter was expected to transfer these monies to the Local Authorities according to the location of the incidence of the levies. However there have been delays in such transfers resulting in a huge backlog of monies remaining with the Provincial Councils. The Finance Commission’s Annual Report has attributed same to the delay in the relevant information being made available by the levying authorities.

In this melee, the Commission reported that in the period 1999 to 2004, the balance retained by the Provincial Councils had exceeded a mammoth Rs 9 billion. It is therefore suspected that currently, it must have topped Rs 12 to 14 billion. This is compatible with the finding of the Commission that ‘significant sums of money remain with the Provincial Councils and are not available to Local Authorities for the provision of local services’.

The above has prompted the enquiry whether this situation amounts to the hijacking of monies owed to the severely cash strapped Local Authorities. It has led to the further search on this massive cash-grab by the Provincial Councils. Thus it has been noted that the Provincial Councils by virtue of the Ninth Schedule of the 13th Amendment to the Constitution have been assigned:

a)The stamp duties on the transfer of properties, such as lands and motor cars.
b)Fines imposed by courts; and
c)Court fees, including stamp fees on documents produced in Court.

However, the respective laws which have established the Local Authorities had also assigned the following as payable to the corresponding Funds of these Authorities;

a) All fines levied, and penalties and other sums recovered by a Court having jurisdiction over the Local Authority area, in respect of provisions in the written law;

b)The amount of all stamp duties paid under the Stamp Duty Act in respect of transfers, mortgage bonds, gifts ,and leases affecting the lands situated within the administrative limits of the Local Authority; and

c) All stamp duties and fees assigned to the Local Authority by the Vehicle Ordinance.

In these circumstances, it is likely that a dialogue would have taken place on the overlapping revenue assignments between the Provincial Councils and Local Government. Thus, each Provincial Council had subsequently enacted its own Statutes to provide for the transfer of Court Fines and Stamp Duties which were collected under its Finance Statute, to the Local Authorities.

The exceptions have been the Sabaragamuwa and the Uva Provincial Councils, which had only enacted Statutes for the partial transfer of monies to the Local Authorities within its respective Provinces.

Mandatory transfers

It is nevertheless noteworthy that the aforesaid Provincial Statutes have not obligated each Provincial Council to mandatorily transfer the said Court Fines and Stamp Duties to the Local Authorities. It has only legitimized such transfer; implying that the consent of the Provincial Minister of Finance was required for same.

The latter had therefore to be satisfied of the Claim for such monies to be submitted by the Municipal Commissioner in the case of a Municipality, and by the Secretary in the case of an Urban Council or Pradeshiya Sabha. The Claim itself had to be forwarded within two years from 31st December of the year in which the Court Fines/Stamp Duties were collected by the Provincial Council. This time-bar had been made five years in the respective Statutes of the Provincial Councils of the Western, Uva, and the North Western Provinces.

Furthermore, the Claim had to be accompanied by a Certificate from the Registrar General, and the Registrar of the Court, or from their nominees. The latter Certificate had to include the information on the date of each payment levied and the date of its remittance to the Provincial Council. In the case of Court Fines and Penalties, the information had to also indicate the Ordinance and Act under which such fines and penalties had been imposed with particular reference to the Schedule thereof.

The above is clearly a TALL ORDER for the predominant number of the country’s 330 Local Authorities, who are severely impoverished with regard to competent staff, and in respect of transport and communication facilities. In such circumstances, the entirety of this matter seems a well orchestrated and maneuvered exercise. Its net outcome has been the non-receipt of billions of rupees of monies due to the Local Authorities. The biggest “defaulter” has been the Western Provincial Council, followed by the Central, North Central, and Uva Provincial Councils. The Provincial Councils which have transferred monies from Court Fines/Stamp Duties to the Local Authorities in proportions higher than the average for all Councils,(with the exception of the North-East Provincial Council),comprise the Sabaragamuwa, North-Western, and Southern Provincial Councils, in that order of magnitude.

Cash-grab
The equally shocking part of this drama consist of the actions of the relevant authorities who could resolve this matter by being more pro-active about it.

The Finance Commission has admitted that local government finance constitutes a component of provincial finance, which therefore makes it an aspect of its duties.Yet it has kept aloof on this cash –grab; other than to comment in its Annual Report that ‘the situation in regard to the transfer of assigned revenue is unsatisfactory’.

The Ministry of Local Government and Provincial Councils has reportedly addressed the Chief Secretaries on this matter on several occasions to no avail. The Ministry of Finance and Planning has kept away altogether from the issue although a glimmer of hope has emerged that could wrap this issue with it in the Budget Speech 2007, which proposed “to set up a close co-ordination mechanism between the Provincial Councils, the Finance Commission, and the Treasury to assist the Provincial Councils to raise revenue to at least one per cent of GDP over the next two years”.

Meanwhile, the victims of the entirety of this terrible financial tangle are the already impoverished Municipalities, Urban Council, and the Pradeshiya Sabhas. According to the 2004 Annual Report of the Finance Commission, they had only received less than half of the Stamp Duty/Court Fines which had been collected by the Provincial Councils in the period 1999 to 2004. On the presumption that this situation has since worsened, the ultimate to suffer its consequences will be the people.

The latter will however be ever grateful to Finance Commission for having exposed this debacle in its 2004 Annual Report.

It may be opportune to mention that the credence of the Annual Report of the Finance Commission will be enhanced if it is released at the same time as the Central Bank Annual Report. These two documents must report to the nation on the health of Provincial and National economies, respectively.

Its conclusions, assessments, and forecasts, must tally for both Reports to be reliable. In fact, the responsibility of the Finance Commission to facilitate ‘balanced regional development’ in the country should be seen to dovetail with the economic and fiscal policy prescriptions of the Government for the mitigation of regional disparities. Consequently, the indices computed in each Report must facilitate it’s readership to easily understand the key outcomes of each tier of government; especially in terms of the progression of the national and local targets set by the Millennium Development Goals.

The two Reports will also be of immense value if each contain the measurement of “development” as reflected in macro-economic terms, and also in terms of ground reality at the local level by way of annual changes in the numbers of ‘land sub-divisions’ and in the issuance of ‘development permits’ by the Local Authorities.

The nexus between them will affirm the necessity for the integration of economic and physical planning in the process of promoting and regulating development.