As the much-delayed local council elections draw closer, the Maldives finds it’s grasp a renewed opportunity to deliver on the sweeping fiscal reforms introduced by the 8th Amendment to the Decentralization Act in 2019.
These reforms were shaped with the aim of improving fiscal empowerment to the local councils and in this regard, a salient change brought about by the 8th Amendment is the requirement of mandating intergovernmental fiscal transfers from the central government to the local councils.
In general, central governments are driven to allocate resources to local government units to serve a number of causes.
One such reason has to do with efficiency.
In contrast to central governments, local government units have limited local opportunities to raise revenue, which increase their costs of expenditure in providing public services that they are better placed to deliver than the central governments. Therefore, allocating resources from central governments optimize delivery of public services by local government units.
Another objective is one of equity. That is, by allocating resources, central governments are able to reduce significant disparities in revenue raising capacities between the local government units.
Finally, a key reason is that allocation of resources help decentralized levels of government achieve national development priorities.
In different jurisdictions, the nature of intergovernmental fiscal transfers can vary in form and formulae: the basis and criteria of the grants could be stipulated in law, it could be granted at the discretion of the central government or allocations may be done by the parliament each year.
This is commonly referred to as a block, conditional or a matching grant allocated by the central government for the functioning of the local government units.
We often come across the argument that when the central government has unfettered discretion to politically maneuver such transfers, the functioning and the autonomy of the local government units are negatively affected.
Furthermore, some academics on the subject propose the idea that when intergovernmental fiscal transfers are a ‘design and a craft of centrally determined policies, it distorts the fiscal incentives of the local governments with different local priorities’[1]
The pertinent question here then becomes, ‘does the 8th Amendment, which introduces the concept of mandatory intergovernmental fiscal transfers, effectively prevent political maneuvering of such transfers and adequately promotes local development priorities?’
The 8th Amendment attempts to address these concerns by providing a fiscal framework for the operation of intergovernmental fiscal transfers. Key features of this framework are:
- mandatory intergovernmental fiscal transfers in the form of block grants;
- earmarks the minimum amount per annum for fiscal transfers from the National Budget; and
- prescribes a fiscal formula to derive the amount of block grant to be allocated to each council.
Specifically, 8th Amendment mandates the central government to allocate block grants for three main purposes: to cover the administrative costs of running the local council office, the expenses incurred in the provision of services under the mandate of the local councils and for development projects undertaken by the council.[2]
The law ensures the central government’s commitment to allocate resources to local councils by earmarking a percentage of each year’s National Budget. In this regard, Section 79 (a) of the Act states that the government shall allocate 5 percent of the forecasted revenue for each year towards the block grants.
Additionally, the government is required to annually allocate 40 percent of the rental income from land, islands, reefs and lagoons that do not fall under the jurisdiction of the local councils towards the block grants. However, in determining the aforementioned 5 percent, the law expressly precludes income from specific projects, forecasted income and rental income that the State receives from the lease of lands, islands, lagoons and reefs.[3]
When using the block grants for various purposes, the local councils are required to follow the relevant regulations enacted under the Act.
According to the 8th Amendment, these block grants are to be disbursed in accordance with the fiscal formula determined by the Ministry of Finance.[4] The law offers guidance on the factors to be considered in determining the fiscal formula for disbursement of the block grants.[5] These include:
- population of the island or the city council;
- land, harbor and lagoon area utilized by the island;
- number of inhabited islands in the administrative division;
- expenditure associated with provision of services and development projects by the local council;
- distance between the hub-islands with the main services and other islands in the administrative division;
- revenue generated by the council; and
- giving regard to equal development opportunities needed for a particular island, city or an administrative division in ensuring the social and economic rights guaranteed under Article 23 of the Constitution.
Going back to the initial question posed, it appears that the 8th Amendment sets in law key features that in practice place sufficient control on the central government’s discretion to allocate and disburse fiscal transfers.
The mandatory nature of the minimum amount for annual block grants, and the considerations the central government must take into account in determining the individual amount of grant to each council, when implemented in tandem with each other, will limit room for political maneuvering.
As far as local development is concerned, the 8th Amendment recognizes its importance and permits the councils to use the block grants on local development projects. Nevertheless, whether these grants adequately promote the development of local economies will be fully known when intergovernmental fiscal transfers are implemented as envisaged by the law and upon empirical studies in this regard.
There are other relevant questions in regards to the above, answers for which can only be guided by further empirical studies. For instance, consider the following; given the fact that the local islands are scattered in nature, which in turn grants each different advantages and disadvantages over natural resources, does a generic fiscal formula to disburse the grants across these islands then effectively address the economic disparities between the islands?
Moreover, would excluding certain types of income while determining 5 percent of forecasted revenue, be in the best equitable interest of the local councils? What impact does it presently have, on the final amount of the grant available to the local councils?
Lastly, would the block grants alone empower local councils without the full realization of their fiscal autonomy?
The Decentralization Act provides a framework for the fiscal autonomy of local councils by granting the right to levy fees for the services they provide, lease out assets, borrow from financial institutions and run businesses. City councils enjoy further rights in that they can raise revenue through issuance of municipal bonds and other securities.
In separate reviews of the decentralization system done in 2013[6] and 2019[7], the studies observed fiscal disempowerment of the local councils by the central government and regression in revenue raising abilities. The latter study found that one-third of the councilors interviewed had stated that the grant given by the government was insufficient and posed as a major challenge to their work.
These findings shed light on the importance of enabling fiscal transfers to the local councils in tandem with fiscal autonomy.
The decentralized administration of the Maldives is guaranteed in the Constitution of the Maldives by virtue of Chapter VIII. Hence the implementation of laws is crucial to make the system of governance enshrined in our Constitution a reality. In order to re-constitute government from a top-down management to a system of decentralized administration that is responsive to the local needs, a number of pertinent conditions need to be fulfilled.
Local councils should be able to procure the local outputs that are tailored to the needs of local preferences. Hence, disbursement of the block grants in a transparent and a timely manner from the central government to the local councils is paramount. The local councils also shall be given adequate fiscal autonomy to raise revenue locally by circumventing central government mandates.
Political will of the central government and technical capacity of the local councils are a must to execute decentralization mandates that do not result in fiscal imbalances and macroeconomic instability.
Drawing to an end, it is important to note that, vigilant mechanisms to combat the issue of corruption is often a closely related matter of decentralization programs.
Co-authored by: Kulshoom Ali, Fathimath Shirveen & Shafeea Riza
Edited by: Rae Munavvar
[1] Litvack, J., Ahmad, J. and Bird, R. (1999). Rethinking decentralization in developing countries. Washington, Dc World Bank.
[2] The Decentralization Act 2010, Article 79 (a)
[3] The Decentralization Act 2010, Article 79 (b)
[4] The Decentralization Act 2010, Article 79 (a)
[5] The Decentralization Act 2010, Article 79 (e)
[6] Study on the Decentralization Process in the Maldives, UNICEF Maldives, May 2013
[7] Review of the Decentralization Framework in the Maldives, Transparency Maldives, 2019
