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بسم هللا الرحمن الرحیم

Fiscal Decentralization in Gadarif State : Did itRealize The Promise?bySharif Ismail Mohamed

University of Gadarif

Faculty of Economics & Administrative Sciences

Department of Economics

P.O Box: 449

E-Mail: sharifbongo@hotmail.com

Mobile Tel. +249912217761

January 2013

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Fiscal Decentralization in Gadarif State : Did it Realize The Promise?bySharif Ismail Mohamed

University of Gadarif, Faculty of Economics & Administrative Sciences

Department of Economics, P.O Box: 449

E-Mail: sharifbongo@hotmail.com

AbstractBased on state and local data of the periods (1998-2010) and (2008-2010)respectively, this study aimed at evaluating the fiscal decentralization experience ofGadarif state of eastern Sudan in the context of different aspects of fiscaldecentralization, namely expenditure assignment, revenue assignment andintergovernmental transfers. The results on the state level reveal that the experiencecame out with a poor fiscal situations indicated by higher dependence on the federaltransfers and higher vertical imbalance. The cross section and panel data analysis ofthe local level of the state indicates the overwhelming dependence of the localitieson the state transfers and the failure of most of the localities to perform theirresponsibilities of delivering the basic services to their constituents.

1. Introduction1.1. BackgroundFiscal decentralization – the devolution of taxing and spending powersto lower levels of government has become an important theme ingovernance in many countries in recent years. Accordingly,restructuring of governmental functions and finances between thenational and lower levels of government has entered the core ofdevelopment debate. That is because “in most countries, nationalgovernment have failed to ensure regional equity, economic union,central bank independence, a stable macroeconomic environment andlocal autonomy" (Shah 2004).

The Sudan has experienced decentralization since 1948 when ruralcouncils formed to hold responsibility of delivering some services andcollecting some revenues. The process of decentralization continuesand by the time the sub national governments have assigned moreexpenditures and revenues responsibilities.

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The significant step toward fiscal federalism in the Sudan was aftersigning the Comprehensive Peace Agreement (CPA) between thegovernment of Sudan and the Sudan People Liberation Movement(SPLM) in 2005. The agreement constitutes a set of institutionalarrangements that should improve the federal system in the Sudan.Thus, it is stated in the Wealth Sharing Protocol of the Agreement that“decentralization and empowerment of all levels of government arecardinal principles of effective and fair administration of the country”.

Nevertheless, the Sudanese experience of decentralization reveals theoverwhelming existence of vertical and horizontal fiscal imbalancereflected in the failure of the lower levels of government to performtheir assigned responsibilities in one hand and the existence of largefiscal disparities among different states of the country on the otherhand.

Gadarif state is one of the 17 states of northern Sudan. It constituteswith Kassala and the Red Sea what was called the Eastern Region.The state experienced decentralization since 1995 when a republicandecree issued increasing the number of states from 9 to 26 withassignment of powers and revenues responsibilities. There are twolevels of government, the state and the local level. The number oflocalities reached 10 in 2008 and 12 in 2010.

Since the implementation of the federal system, the state faced manychallenges in performing its responsibilities toward its constituents.Thus, the delivering of basic services of health, education and waterneed to be financed by the state government under the federal system.The increasing of the dependence of the state government on thetransfers of the central government put the state and localgovernments on great challenge of performing its development projectsin different localities.

This study attempts to provide policy recommendations that wouldhelp constructing broad economic development strategies for bothstate and local governments’ levels with the aim of evaluatingcomprehensively the process of fiscal decentralization in Gadarif stateduring the period (1998-2010).

1.2. ProblemThe basic problem of this research is the increasing of fiscalimbalances, both vertical and horizontal in Gadarif state resulted fromthe implementation of fiscal decentralization in the Sudan in 1995and its practices in the state.

After more than a decade and half of adopting decentralization systemin the Sudan, one can fairly argue that fiscal decentralization failed torealize most of its promises, especially in Gadarif state, i.e. humandevelopment indicators are far away from that of the Millennium

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Development Goals of the United Nations, indicated by the low level ofbasic school enrollment, low rate of population accessing safe drinkingwater, poor income opportunities for rural and urban population (lackof employment opportunities), deteriorating natural environment andthe spread of fatal diseases. Therefore, unless true measures of fiscaldecentralization are taken to reverse the situation, the existingproblems will exacerbate threatening the presumed benefit ofdecentralization in the state.

In spite of that the constitution addresses the fiscal intergovernmentalrelations between the different levels of government, determiningwhich taxes should be collected by which level of government and theexpenditure to be carried out by different tiers of government, butactually, on one hand, Gadarif State government mandated to beresponsible of much expenditure with narrow tax bases and fixedrates. On the other hand, buoyant taxes are assigned to the federalgovernment and the state left with the very low income and politicallyproblematic taxes. As a result, vertical fiscal imbalance is expandedreflecting in low performance of basic services delivery.

Despite forming many constitutional bodies (for example FFAMC andNSSF) to follow up and monitor the distribution of federal fiscaltransfers among different states according to specific criterion,nonetheless, the current practice of federal transfers failed to reflectthese standards. In this context, the state is strongly disadvantagedby the current system of fiscal transfers.

In conclusion, the existence of high fiscal imbalance and thecorresponding high share of federal transfers imply the highdependency of Gadarif State to the central government transfers. Thissituation coupled with the horizontal fiscal imbalance put a greatchallenge for the state to attain sustainable development through thefederal system. This study aims at explaining how the stategovernment disadvantaged by the process of fiscal decentralization ofthe country on one hand and how the localities perform theirresponsibilities under these circumstances on the other hand.

1.3. QuestionsThe basic questions of this research are based on the identifiedproblems of fiscal imbalances in Gadarif state and the correspondingmeasures will be contextualized to solve these problems. Thereforespecific questions are:

i. How fiscal decentralization experience of the Sudan affectsthe financial situations of Gadarif state?

ii. What is the causes and size of fiscal imbalance in Gadarifstate in its two levels of government?

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iii. Does the current system of fiscal transfers of the countryacquire its objective of horizontal equity from the viewpoint ofGadarif state?

iv. Are there sufficient resources of own revenues in thelocalities of Gadarif state to perform their responsibilities ofdelivering the assigned services?

1.4. HypothesesBased on the theory and literature of fiscal decentralization and

considering the experience of both the country and Gadarif state, theresearch hypothesizes the following:

i. Fiscal decentralization deteriorates Gadarif state’s fiscalsituations and expands its vertical and horizontal fiscalimbalance.

ii. The current system of intergovernmental fiscal transfers ofthe Sudan, at least from the view point of Gadarif state is notreflecting the criterion of fiscal transfers’ allocation advocatedby the central government.

iii. Localities of the state fail to collect sufficient revenues toperform their expenditure responsibilities.

1.5. ObjectivesBased on the promises of fiscal decentralization of achieving fiscalautonomy of sub national governments, promoting social services andthen acquiring sustainable economic development, and consideringthe problems experienced the fiscal decentralization practice ofGadarif state, this research aims at achieving the following objectives:

i. Shedding light critically on the experience of fiscaldecentralization of Gadarif State on its differentdimensions: revenues assignment, expenditureassignment and intergovernmental fiscal transfers.

ii. Explaining the extent of vertical fiscal imbalance inGadarif state caused by the implementation of fiscaldecentralization system.

iii. Examining the ability of local governments of the stateto carry out their expenditure responsibilities.

iv. Providing some policy recommendations that wouldcontribute setting post conflict development strategiesas the state is involved in the Eastern Peace Agreementsigned in 2006.

1.6. SignificanceAfter signing the East Peace Agreement (EPA) in October 2006 atAsmara, the issue of fiscal decentralization attracted much attentionas the Wealth Sharing Protocol of the agreement detailed theintergovernmental fiscal relationships between the three levels ofgovernment (national, state and localities) determined theexpenditures and revenues responsibilities assigned to each level ofgovernment. Thus, as the fiscal decentralization is expected to

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reallocate the resources in a manner that ensure fiscal and politicalstability in the country, it became so necessary to analyze theintergovernmental fiscal relations in Gadarif state to setup sustainabledevelopment strategies for post conflict period. This study seeks toemphasize on these issues.

Prior to the Millennium Development Goals (MDGs) of the UnitedNations to improve the human development indicators of poverty,education, health, water, environment and gender situations, it isbelieved that achieving these goals in the context of fiscaldecentralization became the main responsibility of sub nationalgovernment as the delivering of these services assigned to the lowerlevels of the government. Thus, evaluation of this performance needs acomprehensive analytical framework to judge at what limit the stateand the localities performing their responsibilities.

The findings of this study can benefit the policy makers in differenttiers of the state government by exploring the strengths andweaknesses of the experience of fiscal decentralization of the state inthe context of the country experience and help them in designing andforming future policies.

Finally, on one hand, the study adds to the literature of fiscaldecentralization in state and local levels in general, as most studies inthis aspect are cross-country, and on the other hand, it will fill thewide gap for the Sudan as most studies carried out in this context inSudan focus on administrative and political perspectives but notfiscal.

1.7. MethodologyAccording to the objectives of this research, different methods will beused to attain these objectives. Thus, ratio analysis of some fiscaldecentralization indicators will be utilized to evaluate the fiscaldecentralization experience of Gadarif state in the context of thecountry’s. Thus, some indicators have been used as shown below:

Vertical Imbalance (due to Hunter, 1977):

ditureStateExpen

venueOwnVI

Re1

Revenue Effort:

GDP

venueTotalRE

Re

With regard to the objective of evaluation of fiscal impact of thedecentralization on the state, indicators shown in the following tablewill be used to carry out this objective:

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Table (1): Summary of fiscal decentralization indicatorsVariables Indicators Description Level of

MeasurementSub-nationalgovernmentexpenditures

Governmentexpenditureshare

Ratio of Sub-nationalgovernmentspending to totalgovernmentspending

Ratio Level

GovernmentSize

Ratio of Sub-nationalgovernmentspending to GDPper governmentlevel

Sub-nationalgovernmentrevenues

Sub-national Taxautonomy

Ratio of taxrevenue to totalrevenue of sub-nationalgovernment’s

Ratio Level

Sub-nationalnon-taxautonomy

Ratio of non-taxrevenues to totalrevenues of sub-nationalgovernments

Intergovernmentaltransfers

Verticalimbalance

Ratio ofintergovernmentaltransfers to totalsub-nationalrevenues

Ratio Level

Source: IMF (2000)

Adding to this, regression analysis used to evaluate the experience ofexpenditure assignment, revenue assignment and intergovernmentaltransfers in the two levels. In this context, in the state level thefollowing two equations of total expenditure and own revenues will beattempted:

tGDPTransTE 210

tGDPTransStrev 210

WhereTE: is the Total ExpenditureTrans is the Federal Transfers to the stateGDP: is the GDP of the state

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t : is the random variableStrev : state own revenues; andTrans : transfers from the federal government

In the local level, cross localities' data will be used to estimate thefollowing equations:

tOrevPopExp 210

tPopTransOrev 210

WhereTrans : Transfers received by localities from the state : The error termExp : is the expenditure of locality iPop : is the population of locality i; andOrev : is the own revenue of locality i

1.8. OrganizationThe research is organized as follows: section two reviews in broad thetheoretical and empirical literature of fiscal decentralization and offersin brief the evaluation of the existing works with special emphasis onthose which are relevant with the objectives of this research. Sectionthree exhibits the historical background of fiscal decentralizationexperience of the Sudan. Section four offers the summary ofsocioeconomic features of Gadarif state. Section five provides theempirical findings of the research. Section six concludes.

2. Conceptual Framework

Definition of DecentralizationThe terminology often used to discuss the decentralization is thatproduced by Rondinelli (1981), who distinguishes between fourdifferent categories of decentralization: (i) de-concentration is definedas transfer of power to local administrative offices of the centralgovernments; (ii) devolution is the transfer of power to sub nationalpolitical entities; (iii) delegation is the transfer of power to sub nationalgovernments or other government entities; and (iv) privatization is thetransfer of power to private sector.

Early TheoryWallace Oates developed the basic work on fiscal decentralization in1972. The major assumption underlying his theory is that a centralgovernment, due to imperfect information, will produce a uniform levelof public goods across districts. While uniform provision isappropriate for goods with national benefits, such as national defense,it may be inappropriate for goods that are local in scope, such asschool funding and health clinic construction. Uniform funding forhealth clinic construction, for example, may be inefficient because it

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ignores heterogeneous tastes and preferences across districts.Perhaps one community wants more funding for health relatedactivities, while another prefers the money spent on local schools.Local governments can obtain better information about preferences,costs, and other idiosyncrasies unique to their constituency, at alower cost (Oates, 1972).

From a public expenditure standpoint, Musgrave and Musgrave (1984)assert that public goods should be produced by the level ofgovernment whose constituents benefit from that provision. If thebenefit is felt nationally, the public good should be produced by thecentral government. If the benefit accrues at the local level, localgovernments should provide the good. This is due not only to theinformational advantage, but also because local governments arecloser to real resource costs. In the event of a positive spillover—asituation in which one district benefits from the public goodsprovision of another district at no cost—the central government is ableto internalize that spillover with the least amount of transaction costs(Smoke, 2001).

The substantial issue of fiscal decentralization is that of assigningresponsibilities to the low levels of government. In this context,Oates(1999) argues that these responsibilities which range from thedesign to the implementation of various aspect of intergovernmentalfiscal relations, raise a number of questions on the ground of whichknown in the literature of fiscal decentralization as the ‘four basicbuilding blocks or pillars’ outlined as follows:

1. The assignment of expenditure responsibilities: what types ofspending should be conducted by what levels of government?

2. The assignment of tax and revenue sources to different levelsof government: what types of revenue should be raised and what taxrates should be set by what level of government? And which level isresponsible for tax administration and the public expendituremanagement system?

3. Intergovernmental fiscal transfers: how shouldintergovernmental grants and revenue sharing is used to fill the gapbetween expenditures and revenues at sub-national levels and providethe right incentives to sub-national governments? The fundamentalquestion here is how the transfers are designed?

4. Sub-national borrowing: Which level should be able tofinance its spending by borrowing from domestic or external sources,private or public?

Yet, literature of fiscal decentralization focuses on studying the impactof fiscal decentralization on different aspects: economic efficiency,services delivery, poverty, economic growth, macroeconomic stability,and factors of governance…etc. Regarding the issue ofintergovernmental fiscal transfers, the emphasis is on in one hand,assessing its impacts on sub-national governments' incentives and

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equalization. On the other hand, designing an appropriate system oftransfers is the main issue perused by theoretical and empiricalstudies.

That said, evaluating experience of fiscal decentralization of anycountry should come out through these questions. However, the keyissue in decentralization is “the coordination of intergovernmentalfiscal relations, which has puzzled theoreticians and practitioners inrecent years. Given increased complexity in coordinating governmentactions when lower levels of government enjoy greater autonomy ofpolicy making, the key policy challenge in decentralization programs isto design and develop an appropriate system of multilevel publicfinances in order to provide local public services effectively andefficiently while, at the same time maintaining macroeconomicstability” (de Mello 2000).

Expenditure AssignmentThe expenditure responsibilities assignment defines who does what –which function is assigned to different government levels. There is nooptimal assignment of expenditure responsibilities among differentlevels of government in the literature. However, the key principle inthis context is what known in fiscal decentralization as the"subsidiarity principle". This principle suggests that governmentfunctions should assigned to the level that is capable of efficientlyundertaking this function. In general, this principle results in "asituation where, as far as possible, the area where a benefit ofgovernment service is felt coincides with the government boundariesat each level of government" (UNDP 2005).

The theoretical framework in this context generates severalpredictions. In particular: decentralization of expenditureresponsibilities improves efficiency especially in countries with inter–regional heterogeneity of preference for public goods. Moreover, “thebenefits of expenditures decentralization is higher the more localrevenues are independents, and the better quality of governance atlocal level is" (UNDP 2005). However, the subsidiarity principlesuggests that three types of functions are best performing by centralgovernment:

1- Provision of public goods and services that benefit the wholecountry (defense...etc.);

2- Income redistribution or social policies (pensions,unemployment insurance)

3- Government activities that involve spill-overs or externalitiesbetween local governments

Regional or states governments are often assigned the provision ofimportant public services, such as health, education, and police. Localgovernments (localities) provide local public services such, local roads,agriculture, water and sanitation and recreation facilities.

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This assignment of responsibilities is based on efficiency or equityreasons in the manner the particular expenditure program is designedand delivered. On efficiency ground, three sorts of arguments apply.First, program benefits may spill over to other communities; second,decentralized decision making can lead to inefficiencies because theydistort cross-boundary transactions in product or factors. Third, fiscalcompetition among different sub-national governments may lead toinefficient choice of expenditure programs. On the other hand, equityissues apply to state-level governments, which are responsible forproviding public services such as health, education and welfare,which can achieve redistributive goals that may be of national policyobjective.

In general, the degree of discretion to lower levels of governmentdiffers from federation to another as does the manner at which thatdiscretion constrained.

Revenues AssignmentWhile the assignment of expenditure responsibilities among differenttiers of government is mostly similar in different countries, theassignment of revenues sources is varies widely among federations.In this context, the key question is: what revenue sources assigned tosub-national governments? Answer of this question is related to theassignment of expenditure responsibilities: finance should followfunction.In this regard Shah (1991) determined the consideration of revenuesources assignment as follows:

- Progressive redistributive taxes should be central.- Taxes suitable for economic stabilization should be central.- Lower level taxes should be cyclically stable.- Tax bases distributed highly unequal between jurisdictions

should be centralized.- Taxes on mobile factors of production are best administered at

the center residence.- Based taxes such as sales of consumption goods to consumers

or excises are suited for states.- Taxes on completely immobile factors are best suited for local

levels;- Benefit taxes and user charges might be appropriately used at

all levels.In general, tax assignment in various federations confirm to theseguidelines, although there are individual cases of departure fromthese norms (World Bank, 2000:15). Nevertheless, "one problemregarding the assignment of revenue sources in many countries is thatwhile sub-national governments need to have at least some revenuediscretion in order to fully benefit from fiscal decentralization reforms,central governments often seem unwilling to provide a significantdegree of real revenue autonomy to sub-national governments" (UNDP

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2005). In these cases intergovernmental transfers become necessaryto fill the revenue gap.

Intergovernmental TransfersIntergovernmental fiscal transfers are dominant feature of sub-national finance in most countries. They are used to ensure thatrevenues match the expenditure needs of various levels of sub-national governments. They are also used to advance national,regional and local objectives outlined in the literature as follows:

- Correcting or adjusting vertical imbalances – closing the fiscalgaps between expenditure assignments and revenueassignment.

- Compensating sub-national governments for complying withcentral government requirements of implementing delegatedcentral government programs.

- Correcting or adjusting horizontal imbalances: transfers can beused to "equalize" the level of service delivering among differentsub-national governments.

- Correcting or adjusting externalities with public goodsprovision. Grants may be used to compensate local governmentsfor services they deliver, which impact areas of nearjurisdictions.

- Setting national minimum standards to preserve internalcommon market and attain national equity objectives.

Types of Intergovernmental TransfersThere are two types of transfers to sub national governments:conditional and unconditional. Conditional grants are also known asspecific purpose grants, block, sectoral, categorical or earmarkedgrants. Unconditional grants on the other hand are also known asunited or general purpose grants.

In general, when assessing a system of intergovernmental relations,there are two important policy questions to answer. First: is thesystem of intergovernmental fiscal relations fair to each level ofgovernment by providing sufficient resources to cover expenditureresponsibilities? This question refers to the vertical fiscal imbalances.Second: are there large fiscal disparities among different regions? Thiscase refers to the horizontal fiscal imbalances (Vazquez 2002).

This study seeks to evaluate the experience of fiscal decentralization ofGadarif state in local and state levels during the period (1998-2010)with the aim of filling the gap of state and local levels literature.

3. Fiscal Decentralization in the Sudan: A ReviewThe Sudan has experienced decentralization since 1948 when ruralcouncils formed to hold responsibility of delivering some services andcollecting some revenues. A major decentralization policy change wasinitiated with the introduction of 1951 Act. Under this Act, the

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government created councils with legal corporate status and clearlydefined responsibilities. Elbattahani (2008).

In 1972 the country witnessed another significant development in thegovernment structure as a result of Addis Ababa peace agreementsigning. Consequently, the Government of the Southern Regionformed and granted a substantial degree of autonomy including taxlevies. (Elshibly1990).

In 1974 the People` Local Government Act introduced importantmeasure toward decentralizing the country. Accordingly, the countrywas divided to 10 provinces and some functions like education, healthand livestock shifted from the central government to the local councilswith the same taxing powers.

The Regional Government Act of 1980 introduced further measures ofdecentralization. Thus, new regional governments created, given andgranted a substantial degree of autonomy. No additional taxingpowers given to these regions other than previously performed by localcouncils and provinces (Elshibly1990).

The process of real fiscal decentralization in Sudan began in 1995when a republican decree issued increasing the number of states from9 to 26 with assignment of powers and revenues responsibilities. Thesystem proceeds with three tiers, federal, state and local. Accordingly,states governments have four sources of revenues as set in theconstitution. These sources are:(i) Transfers from the federal budget through the Northern StatesSubsidy Fund (NSSF).(ii) Off-budget transfers from the federal government of 43% percent ofVAT collections and 10% of public enterprise profits.(iii) Revenues collected directly by the states through taxes, fees anduser charges; and(iv) Loans and borrowing in accordance with the constitution.On the other hand, local government revenues are a component oftaxes on property, local transportation, local livestock production andother local taxes or duties.

The significant step toward fiscal federalism in the Sudan was aftersigning the Comprehensive Peace Agreement (CPA) between thegovernment of Sudan and the Sudan People Liberation Movement(SPLM) in 2005. The agreement constitutes a set of institutionalarrangements that should improve the federal system in the Sudan.Thus, it is stated in the Wealth Sharing Protocol of the Agreement that“decentralization and empowerment of all levels of government arecardinal principles of effective and fair administration of the country”.That is of course in a decentralized system with significant devolutionof power to the different levels of government i.e. section (113) of theprotocol states that “An expenditure function should be assigned to

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that level of government whose jurisdiction most closely reflects thegeographical served by that function. The delivery of a particularservice (expenditure assignment) may be carried out exclusively by agiven level of government or by two or more”.

On the revenues side, according to section (114) of the same protocol,“states levels of the government shall have the right to determinewithout national inference the structure of revenue base and the levelof the charge or tax rate applied to that base”. Moreover, the wealthsharing protocol “provides a detailed breakdown of own sourcerevenue for schedules all levels of government must radically reformtheir budgetary process” Bell and Ahmed (2005).

To perform the task of implementing fiscal decentralization proceedas outlined above, many constitutional bodies and agenciesestablished; i.e. Northern State Support Fund (NSSF) created to setcriteria of distribution of the current and development transfers. TheNSSF is based on nine criteria: financial performance, populationdensity, natural resources, human resources, infrastructurecondition, per capita income, education, health and securitysituations. Each factor receives 10 per cent weight except the financialperformance which receives 20 per cent.

The Fiscal and Financial Allocation and Monitoring Commission(FFAMC) have been structured in order to ensure appropriateutilization and sharing of resources both vertically and horizontally,transparency and fairness in allocation of funds among the states andto monitor and ensure that equalization grants from nationalgovernment are through a specific criterion based on the following:1. Population size2. Minimum expenditure responsibilities3. Human Development Index – social indicators4. Geographical areas5. Fiscal efforts; and6. The effect of war factor.

The greater challenge in this context is how can the FFAMC perform,i.e. some questions may raise such as: how allocation of such grantswill be determined, how will be funded, by which level of government,etc. what sort of vertical and horizontal equalization is intended andhow will be achieved? Bell and Ahmed (2005).

National Reconstruction and Development Fund (NRDF) is created todevelop the war affected areas and the least developed areas takingthe effect of war and level of development as the main criteria.

Building on the Comprehensive Peace Agreement, the JointAssessment Mission (JAM) formed in 2005 to develop a frameworkaiming at meeting the Millennium Development Goals (MDGs) for the

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people of Sudan, especially those in the south and other war affectedareas. The common themes of this framework are including “the focuson broad-based and inclusive economic growth and empowerment ofthe people through a decentralized system of governance and servicesdelivery” JAM (2005).

With regard to the fiscal trends of local governments in the Sudan, itis characterized by many features. On one hand, "the increase indemand on services coupled with the low share of developmentspending raises a number of questions regarding the states'commitment to long term development and macroeconomic stability.In addition to the administrative problems related to taxes, localgovernment may refrain from raising taxes too high due to politicalreason, adverse effects on both the people, especially the poor localeconomic development. The forms of taxation can be imposed onsubsistence economies are very limited". Gangi and Ibrahim (2008).

On the other hand, intergovernmental fiscal transfers in Sudan – withits six types (current transfer, development transfers, and additionalsupport transfers, value added taxes (VAT) and Benzene Transfers)increase as percentage of federal revenues from 2.7% in 1996 to 30%in 2005 suggesting that the ability of sub-national governments tofinance their expenditure from their own revenues declined from 92%in 94/1995 to about 36% in 2005” (Elbaawi and Suliman 2007).Consequently, sub national governments became increasinglydependent on central transfers i.e. it reached 36% in 2006 and 38% ofthe federal government expenditure in 2007.

Furthermore, data on state level about the own source revenuecollections which is available suggests that own source revenuesshares in 2005 ranged from 66% in Red Sea to 12% in North Darfour.World Bank (2008). The level of reliance on transfers is greater, for thelocality level in Gezira and North Kordofan states, over 80% of localityrevenues on average come from the state level. Adding to the lack ofautonomy is the high share of the transfers that are earmarked.

However, Sudan – like any country in Africa, its experience ofdecentralization is in progress as part of a transition from dictatorshipto democracy. Thus, while spending responsibilities and borrowingauthorities – in some extent are devolved to states government, on theother side the revenue authority – at least of the tax remains with thecentral government. In addition, in spite of forming many institutionsto perform the fiscal transfers to sub-national governments, it is fairto argue that the way of allocating these transfers is unclear.Moreover, they do not reflect the needs standard stated in theconstitution.

4. Gadarif State: A Socioeconomic Review

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Gadarif State, together with Kassala and Red Sea States, comprise theregion of East Sudan as defined by the Eastern Sudanese PeaceAgreement and consequent administrative arrangements. The state islocated between longitudes 33º 30‘ and 36º 30‘ to the East, andlatitudes 12º 40‘ and 15º 46‘ to the North. Gadarif shares aninternational border with Ethiopia to its East. Nationally, the state isbordered by Kassala and Khartoum State to the North, El Gezira Stateto the West and Sennar State to the South.

The state’s total population is estimated to stand at some 1.35 million(Central Bureau of Statistics 2008) with an annual growth rate of3.87%. Over two-thirds of the populations live in rural areas andpopulation density on a state-wide basis stands at around 19 personsper km2. The total area of Gadarif state is calculated to be around71,000 km². Gadarif State is divided into ten administrative localities.

Administratively, the state is recently divided to twelve localities eachis governed by a commissioner.

4.1 PopulationThe table below shows the statistics of the state populations and theirgrowth according to different population censuses of the country.

Table (1-4): Population of the state according to the different censusesYear Population Growth rate %1973 580000 -1983 742000 28%1993 1148262 55%2008 1334947 16%

Source: CBS Office-Gadarif State (2008).

The table above shows the rapid increase of the populations of thestate especially in the period (1983-1993) when the populationincreased by 55%. This can be attributed to the great flow ofimmigrants from different parts of the country and the neighborcountries especially the African Horn countries to the state because ofthe great famine and drought destructed the region in this period.

Tables (2-4) and (3-4) below show the distribution of the populationsin the state, sources of livelihood.

Table (2-4): Distribution of population among different localitiesNo. Locality Population % of Total1 Baladiyat El Gadarif 269,395 202 Gadarif Center 111,669 8.33 El Butana 71,092 5.34 El Fashaga 120,835 95 El Fao 176,662 13

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6 El Rahad 135,682 107 El Mafaza 60,756 4.58 East Gallabat 113,334 8.49 West Gallabat 91,875 710 Basonda 47,562 3.511 El Gurreisha 83,394 612 Gala El Nahal 66,122 5

Total 1,348,378 100Source: central Bureau of Statistics – Gadarif State

Table (3-4): Percentage of Households classified by main Source of Livelihoodin Gadarif State (2008)

Level Source of Livelihood PercentageState Subsistence Crop Farming 54.44

Subsistence Animal Husbandry 4.20Wages and Salaries 11.36Owned Business Enterprise 16.03Property Income 4.08Remittances 1.88Pension 0.62Humanitarian Aid 3.31Not stated 4.09

Urban Subsistence Crop Farming 12.83Subsistence Animal Husbandry 1.51Wages and Salaries 27.17Owned Business Enterprise 34.61Property Income 10.71Remittances 2.89Pension 1.48Humanitarian Aid 3.27Not stated 5.55

Rural Subsistence Crop Farming 71.20Subsistence Animal Husbandry 3.48Wages and Salaries 5.58Owned Business Enterprise 9.32Property Income 1.65Remittances 1.52Pension 0.31Humanitarian Aid 3.38Not stated 3.56

Nomads Subsistence Crop Farming 5.90Subsistence Animal Husbandry 88.09Wages and Salaries 1.21Owned Business Enterprise 0.17Property Income 0.06

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Remittances 0.43Humanitarian Aid 0.81Not stated 3.34

Source: Central Bureau for Statistics- based on Census 2008

Table (3-4) above explains that the crop farming sector is the mainsector in the state which employs of about 54.5% of the populationsindicating the dominance of the agricultural sector in the state. Withregard to the urban residents, the main source of livelihood is OwnedBusiness Enterprise and wages and salaries sectors. They employ34.6% and 27.1% of the population respectively. Contrary to theurban residents, the main source of livelihood of the rural residents isof course the subsistence crop farming which employs of 71% of thepopulations in this sector. The table also shows that the subsistenceanimal husbandry is constituted the main source of livelihood i.e. itincludes of about 88% of the populations.

Selected human development indicatorsTable (4-4) bellow exhibits some human development indicators forGadarif state compared to that of the country.

Table (4-4): Selected human development indicators for Gadarif Statecompared to Sudan in (2012)Indicator Gadarif Sudan

Mother Mortality Rate (each 100000) 564 417

Child Mortality Rate <5 years (for each 1000) 20.8 22.2

Total Fertility Rate 4.8 3.9

Poverty Rate 50.1 46.5

Unemployment Rate 15 15.9

Source: Central Bureau for Statistics - 2011

4.2 GDPThe chart below shows the GDP of the state during the period (2006-2010) indicating the positive growth in this period. It averaged at 5.4%in the mentioned period (Ministry of Finance and Economy, Gadarifstate 2011). Agriculture is considered the main sector in the stateeconomy; it contributes of about 79% in the GDP as shown below.Services sector constitutes 15% of the GDP of the state. The weakestsector in the state economy is the industrial sector which contributesby only 6% in the GDP during the period above in spite of the hugeagricultural and livestock production of the state. This situationattributed to the weak infrastructures and absence of incentivepolicies and strategies encouraging the sector in the state.

18

0

500

1000

1500

2000

2500

2006 2007 2008 2009 2010

GDP of Gadarif state in SDG millions in the period (2006-2010)

Source: 4th Economic Review, Gadarif State 2012

4.3 Agricultural SystemsAgriculture is constituted as the main activity in Gadarif state. Henceof about 70% of the populations are working in the agricultural sector.The cultivable area is about 11.3 million feddans of improved andfertile lands. The rate of rain falling is about 100 – 500 mill. in theyear in the northern and western areas of the state and of about 500 –900 in the east and south areas which lay in the rich Savanna region.

There are two major types of agricultural systems in the state: theRain fed and the irrigated agriculture. The irrigated agriculture isexists in the Rahad Scheme. The other type of agriculture is the Rainfed. It is divided into two types, traditional and mechanized farming.

19

The former type is covering the most rain fed areas. Thus, the state isconsidered as pioneer for this type of agriculture in Sudan. It startedin the area of Gadambelya – 45 Km west Gadarif city in the 1940s andthen expanded to the most rain fed areas and became the mainproducer of Sorghum and Sesame in the country. Nevertheless, thistype of agriculture is commercially oriented and most farmers dependon bank credits to finance their activities.

The traditional rain fed agriculture on the other hand is existedaround the villages in small farms known as (Bildat). The main cropscultivated here are Sorghum, Millet and Sesame for subsistencepurposes. Farmers in this type of agriculture use traditional forms offinance to run their activities. These forms are Sheil, Katafally andKasir). But these types of finance are highly cost and put the farmersin perpetual indebtedness.

The total agricultural land (11.3 million feddan) is distributed amongthe different types of farming and forestry as follows:- Total arable land 8.602.600feddans- Forestry 2.732.700 feddans- Grazing 4,200,000 feddans

5. Fiscal Decentralization in Gadarif StateIn this section the implementation of fiscal decentralization in Gadarifstate will be outlined and evaluated on the ground of revenuesassignment, expenditure assignment and intergovernmental transfersin the two levels of government: state and local during the period(1998-2010).

5.1 Assignment of Expenditure Responsibilities in Gadarif StateThe following table explains the trend of total expenditure in Gadarifstate during the period (1997-2010).

Table (1-5): Budgeted and Total Expenditure of Gadarif State during (1997-2010) in Millions SDGs

year Budgeted TotalExpenditure

Actual TotalExpenditure

% of Budgeted

1998 44.1 28.8 65%1999 44.9 45.4 101%2000 59.3 41 70%2001 71.7 48.4 67%2002 70.9 56.4 79%2003 70.2 73.7 82%2004 118.1 102 90%2005 158.1 138 87%2006 216.4 192 77%2007 252.2 188 87%2008 460.2 200 40%2009 520.2 296 52.3%

20

2010 566.7 354.9 42.7%Average 72.3%

Source: Ministry of Finance & Labour Forces – different economic reviews.

Table (1-5) and the chart below explain the higher increase of totalexpenditure of the state accordingly to the increase of government sizei.e. the number of localities increased from 5 in 2005 to 12 in 2010. Itis to be noted that in the last three years (2008-2010) the ratio ofactual expenditure to budgeted expenditure is rapidly decreased from87% in 2007 to only 40%, 52% and 42% respectively indicating thehigher deterioration of revenue performance of the state andconsequently the government commitments in this period.

0

100

200

300

400

500

600

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Budgeted and Actual Expenditure in Gadarif State (1998-2010) inMillions SDG

Bdg Exp Act Exp

Expenditure Allocation in the stateTable (2-5) below shows the structure of the budget of the state interms of its different chapters during the period (1998-2010).

Table (2-5): Percentage share of different chapters of the budget in totalexpenditure in the period (1998-2010)

Year Chapter(1)%

Chapter(2)%

Chapter(3)%

Chapter(4)%

Total%

1998 29 56.7 4.7 9.6 1001999 22.3 61 2.7 13.9 1002000 36 46.9 2.2 14.9 1002001 40 50 1 9 1002002 46.3 45 1.2 6.9 1002003 46 34 2 18 1002004 50 28 3 19 1002005 47 25 4 24 1002006 40 24 4 32 1002007 38 28 3 31 100

21

2008 42 24.6 2 31.4 1002009 46 13 15 26 1002010 43 11 8.7 37.3 100

Average%

40.4 34.4 4.2 21 100

Source: Calculated from data of Ministry of Finance & Labour Forces- Gadarif State

Where Chapter One is for salaries and wages, Chapter Two forgovernment expenditure on goods and services, chapter three forcapital goods and chapter four for development.

40.4%

34.4%

4.2%

21%

Percentage share of different chapters of the budget in total expenditure inthe period (1998-2010)

cha. 1

cha.2

cha.3

cha.4

The table and the chart above show the shares of different chapters ofthe budget of the state as average of the above period as follows:40.4%, 34.4%, 4.2% and 21% respectively explaining that only 21% ofthe budget devoted to development in this period indicating the poorservices of the state: water, health and education.

Regression AnalysisIn this context, two equations will be attempted to investigate theexpenditure and the revenue response to federal transfers and theGDP of the state during the period of the study. The importance offiscal response of the sub national government analysis stems fromthat it is forecasting the impact of different transfers designs on localfiscal behavior which estimate both the level of transfers required andthe impact of the transfers on their objectives. The similar analysisfound in Bahl and Lin (1992), Gramlich (1977) and Mushkin & Cotton(1968).

State Expenditure ResponseIn this regard, total expenditure of the state is used to GDP andfederal transfers of the period (1998-2010) to investigate the impact offederal transfers on expenditure by estimating the grant elasticity

22

which indicates whether the transfers have stimulation orsubstitution impact on the state expenditure. To accomplish thisobjective, the following equation will be estimated:

tGDPTransTE 210

WhereTE: is the Total Expenditure of the stateTrans: is the Federal Transfers to the stateGDP: is the GDP of the state; and

t : is the random variable

Time series data of the above variables of the period (1998-2010) havebeen used to investigate the factors affecting the total expenditure ofthe state. Results of the estimated equation are shown in table (3-5)below:Table: (3-5): Results of total expenditure equation estimation of the period (1998-2010)DependentVariable

IndependentVariable

Coefficient T-Value Sig.

R2 F Change

Log TE (Constant) -9.6 -3.4 00 0.89 37.4*

Log GDP 1 3.9 00Log Trans -0.06 -0.3 0.8

Source: Own calculation* Significant at 1%

Results of table (3-5) above show that increase in one SDG in GDPassociated with an increase in the total expenditure by the samevalue. With regard to the transfers, it is found insignificant to totalexpenditure indicating that the increase in transfers have nosubstitution impact on the expenditure of the state. This result can beinterpreted as that the increase in transfers have no stimulationeffect on own revenues of the state which may raise total expenditure.

5.2 Decentralization of Revenue Sources of the StateIn this context, the analysis will emphasized on the performance ofdifferent revenues of the state, revenue effort, fiscal imbalance and theimpact of federal transfers in the period (1998-2010).

Table (4-5) and the chart below shows the budgeted and the actualtotal revenues of the state during the period (1997-2010).

Table (4-5): Total budgeted and actual revenues of the state in the period(1997-2010) in Millions SDGs

Year Budgeted TotalRevenues

Actual TotalRevenues

% of BudgetedRevenues

1997 - 27.1 -1998 - 28.8 -1999 44.8 38.9 87%2000 64.7 37.6 58%2001 71.7 44.6 62%

23

2002 70.9 56.3 79%2003 90.2 73.8 82%2004 118.2 106.8 90%2005 158.1 140 89%2006 214.3 173 81%2007 252.1 216.4 86%2008 460.2 183.8 47%2009 520.2 271.9 52%2010 566.7 245.9 44%

Average 71%Source: Ministry of Finance & Labour Forces

0100200300400500600

Budgeted and Total Actual Revenues in Gadarif State in theperiod (1999-2010) in Millions SDG

Budgeted Total Rev. Actual Total Rev.

Table (4-5) and the chart above show that the actual total revenues ofthe state reported a weak performance. For example it constituted71% of budgeted total revenue and then witnessed a rapiddeterioration in the next three years (2008-2010). It constituted only47%, 52% and 44% of the budgeted revenues in the last three yearsrespectively. To promote this performance, detailed data of all revenuebases should be provided to set realistic and achievable revenues inthe budget.

Share of Different Sources in Total Revenues of the StateTable (5-5) below shows the share of different sources of revenues ofthe state during the period of the study.

Table (5-5): Share of different sources of revenues in total revenues of the statein the period (1997-2010)year Own Rev.(in

Millions SDG% of TotalRevenues

FederalTransfers

%of TotalRevenues

1997 27.1 100 0 01998 28.8 100 0 01999 38.3 98 0.6 22000 34.9 93 2.7 72001 27.9 63 16.7 37

24

2002 25.1 44.5 31.2 45.52003 34.8 47 39 532004 45 42 60.8 582005 50.3 43 87.3 572006 59.3 50 113.8 502007 60.8 50 154.1 502008 61.3 33 140.5 672009 90.4 33.3 181.4 66.72010 82.3 36.5 163.4 66.5

Source: Calculation from data of Ministry of Finance & Labour Forces- Gadarif State

0

50

100

150

200

250

300

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

contribution of different sources in total revenues during theperiod (1997-2010)

Own Rev.(in Millions SDG Federal Transfers

Table (5-5) and the chare above explains that the gap between the ownrevenues of the state and the federal revenues is extremely expandingby the time. Thus, in 1997 and 1998 the state is self-dependent. Butthis situation is gone worse reaching as 65.5% of the total staterevenues in 2010 as shown in the chart below. This deterioration inthe total revenue of the state attributed mainly to the republicandecree that cancelled the tax on agriculture in (2001). As the state'seconomy is agricultural in nature, the own revenue declined and thecompensation made by the federal government failed to recover thefiscal imbalance made.

25

36.5%

64.5%

percentage share of own revenues and fedral transferse in total revenue2010

own revenue %

transfers %

Fiscal Imbalance in Gadarif StateTable (6-5) below shows the vertical imbalance of the state and itscomponents.

Table (6-5): Own revenues, total expenditure and vertical imbalance of Gadarifstate during (1998-2010)year (1) Own Rev.(in

Millions SDG)(2) Total

Expenditure(3)Imbalance

(1/2)(4)VerticalImbalance

1- (3)1998 28.8 28.8 1.00 01999 38.3 45.4 0.84 0.162000 34.9 41 0.85 0.152001 27.9 48.4 0.58 0.422002 25.1 56.4 0.45 0.552003 34.8 73.7 0.47 0.532004 45.o 102 0.44 0.562005 50.3 138 0.36 0.642006 59.3 192 0.31 0.692007 60.8 188 0.32 0.682008 61.3 200 0.31 0.692009 90.4 296 0.31 0.692010 82.3 354.9 0.23 0.77average 0.50 0.50

Source: Own Calculation

Table (6-5) explains that the vertical imbalance in the state is rapidlyincreasing. It increased from 16% in 1999 to 77% in 2010 indicatingthe deterioration of fiscal situations of the state under fiscaldecentralization.

Revenues Effort in Gadarif StateRevenues effort is computed as the ratio of total revenues of the stateto GDP. It used to investigate where the revenues collection reflectsthe economic activities in the state proxied by the GDP. The table

26

below presents the revenue effort of the state in the period (1998-2010).

Table (7-5): GDP, Total Revenues and Revenue Effort in Gadarif State (1998-2010)year (1) GDP in

Millions SDG(2)Total Revenue

(Millions SDG)(3) Revenue efforts

(2)/(1)1998 1022.5 27.1 0.031999 1113.3 28.8 0.032000 1314.5 38.9 0.032001 1236.1 37.6 0.042002 1542.9 44.6 0.042003 1532.6 56.3 0.052004 1597 73.8 0.072005 1720 106.8 0.082006 1752.8 140 0.102007 1826 173 0.122008 1980 216.4 0.092009 2039.3 183.8 0.132010 2230.9 271.9 0.11average 0.07

Source: Own Calculation

Table (7-5) above shows the very low performance of revenues of thestate compared to the GDP. It can be attributed to the in-adequateassignment of revenues sources i.e. most revenues sourcesdetermined to the state level were in-efficient and highly problematicand conflicting with the constituents.

Share of Tax and Non-tax Revenues in total State RevenuesTable (8-5) above shows the share of tax and non-tax revenues in totalrevenue of the state in the period (1997-2010).

Table (8-5): Tax and non-tax Revenues ( in SDGs ) in Gadarif State (1997-2010)

27

Source: Own Calculation using data of Ministry of Finance & Labour Forces- GadarifState.Table (8-5) explains that 77.8% of the state revenues are from non-taxand the remaining 22.2% are from taxes in average of the period(1997-2010). This can be attributed to that the agriculture and ruralactivities dominates the state economy.

22%

78%

Share of Tax and Non-tax Revenue in Own revenues (1997-2010)

% tax revenue % non tax revenue

Impact of transfers on the state revenues (regression analysis)

% of state rev.non tax%of State Rev.Tax Rev.Year76.520.723.56.4199779.12320.15.8199877.330.222.78.7199986.323.913.75.1200083.239.916.84.7200180.551.419.54.920028367.9175.920038499.6167.2200482130.9189.1200577159.42313.6200674200.62615.8200771166.62917.22008

70.1244.929.927200964.5216.735.529.2201077.822.2average

28

In this regard, data of state revenues ( Strev ), transfers from federalgovernment (Trans ) and the GDP of the state in the period (1998-2010) will be used to examine the response of state revenues tofederal transfers. Thus, the following equation will be estimated:

tGDPTransStrev 210

Using OLS technique for data of the above equation in logarithmicform estimated as shown in table (9-5) below.

Table: (9-5): Estimates of state revenues equation of the period (1998-2010)DependentVariable

IndependentVariable

Coefficient T-Value Sig.

R2 FChange

logStrev (Constant) -6.511- -2.719 .024 73% 12*LogTrans -.134 -1.455 .18LogGDP 2.616 3.325 .01

Source: Own calculation* Significant at 5%

Results shown in table (9-5) reveal that the state revenues is notresponding to the federal transfers variations (it found insignificant)indicating the failure of one of the basic objectives of the federaltransfers of inducing the local revenues by directing the transfers toproductive channels. The GDP is found significant at 1% with higherelasticity (2.6)

6. Fiscal Decentralization in Local LevelIn this section the experience of fiscal decentralization of Gadarif statein the local level will be evaluated in the context of revenues andexpenditure assignment and the state fiscal transfers to the twelvelocalities.

Expenditure AssignmentEach locality in the state, according to the constitution is entrusted toperform a wide range of responsibilities that cover different aspects.These responsibilities are: basic education, public health, social,public works and agricultural and local economic development.

The table below shows the total expenditure of different localities inthe period (2008-2010).

Table (1-6): Localities' Total Expenditure (in Mill. SDGs) in the period (2008-2010)Locality/Year 2008 2009 2010 average Ranking

(Z to A)Gadarif Town 22.62 22.63 27.07 24.11 1East Gallabat 8.13 8.6 8.53 8.42 5West Gallabt 7.99 8.43 9.83 8.75 3Rahad 7.61 9.07 8.95 8.54 4Fao 9.28 10.12 11.64 10.35 2

29

Fashaga 6.41 7.37 8.49 7.42 7Butana 2.76 3.3 4.69 3.58 10Gadarif Centre 6.69 7.56 9.52 7.92 6Gala Elnahal 3.83 4.23 4.96 4.34 9Gurreisha 3.99 4.16 5.05 4.4 8Basonda Na Na 1.66 1.66 12Mafaza Na Na 1.87 1.87 11Total 79.31 85.47 102.26 89.01

Source: Ministry of Finance, Economy and Labour Forces, Auditing Champers

Table (1-6) and the chart above explain the higher variations of totalexpenditures of different localities supported by significant standarddeviation of 5.9 at 99% confidence level. For example Basondalocality's total expenditure constitutes only 7% of Gadarif Town's. Thissituation explains the existence of large horizontal fiscal imbalanceacross localities.

Share of Different Sources on Development ExpenditureTable (2-6) presents shares of different government levels indevelopment expenditure of the state.

Table (2-6): Percentage Contribution of Different Sources on TotalDevelopment Expenditure of the state (2008-2010)Source/Year 2008 2009 2010 Averagelocalities 18 7.6 6 11State & Federal 79.3 68.8 75 74NGOs 2.7 6.9 2 4East Fund Na 16.7 17 11total 100% 100% 100% 100%

Source: Calculated from data of Auditing Champers-Gadarif State (2008-2010)

30

The table and the chart above show that the main source ofdevelopment expenditure of the state is the federal transfers and stateown revenues. They share by 74% of the total developmentexpenditure while localities contribute by only 11% indicatingoverwhelming fiscal dependence of localities on state and federalgovernment.

Response of Local Expenditure to Revenue SharingIn this part, local expenditure of different localities will be examined tosee if it is responsive to revenue sharing. Thus the following equationwill be used:

tOrevPopExp 210

WhereExp is the expenditure of locality iPop is the population of locality iOrev is the own revenue of locality I and is the error term

Using pooled data across localities' of the period (2008-2010) for theabove variables in logarithm form, the following results have beenobtained:Table: (3-6): Local Expenditure Equation Estimation Results of the period (2008-2010)DependentVariable

IndependentVariable

Coefficient T-Value Sig.

R2 FChange

Log Exp Constant -6.863- -5.72 .00 89% 36.322*

Log Orev 1.526 6.430 .00Log Pop -.052- -.406- .69

Source: Own calculation* Significant at 1%

Results on table (3-6) above reveal that local expenditure is stronglyresponses to own revenues of localities (indicated by higher elasticity

31

and higher significance) suggesting that local own revenue stimulatesthe local expenditure. As the own revenue's share in total localrevenue is very small and the dependence is on transfers, anyincrease in own revenue causes increase in local expenditure. Withregard to population variable, it is found that local expenditure doesnot respond to population indicating that the local expenditure is notreflecting the variations in populations among different localities.

Revenues AssignmentIn this part the performance of different sources of revenue, fiscalimbalance and revenue effort will be analyzed. Regression of crosslocalities data of revenue and transfers will be carried out to examinethe local revenue response to state transfers.

Local Own RevenueThe table below shows the own revenues of different localities in theperiod (2008-2010)

Table (4-6): Budgeted and Actual own revenues of Gadarif's Localities inMillions SDGs during the period (2008-2010)Locality/Year 2008 2009 2010

Budg. Act. %* Budg. Act. %* Budg. Act. %*GadarifTown 8.8

5.24 608.8

6.4 739

5.561

E. Gallabat 3.2 1.5 47 3.2 1.75 45 1.38 1.29 93WestGallabt 0.75

0.37 490.74

0.38 510.75

0.4560

Rahad 2.2 1.6 73 2.2 1.87 85 1.73 1.46 84Fao 1.67 0.92 55 1.36 0,91 67 1.46 1 68Fashaga 0.97 0.4 41 0.9 0.65 72 1 0.71 71Butana 0.67 0.29 43 0.59 0.39 66 0.64 1.19 186Gadarifcentre 1.5

0.44 291.1

0.41 371.2

0.6554

GalaElnahal 0.6

0.28 470.55

0.25 450.55

0.4684

Gurreisha 1 0.23 23 0.78 0.27 31 0.78 0.32 41Basonda - - - - - - 1.37 1.05 77Mafaza - - - - - - 0.57 0.24 42Total

21.3611.28 53

% 20.2313.28 66%

20.4414.34

70%Source: Calculated from data of Auditing Champers (2008-2010), Gadarif State%* is actual percentage of budgeted

Table (3-6) shows that the localities collect only 63% of budgetedrevenues on average of the period (2008-2010) explaining theweakness of revenue administration of the localities and poor revenuecapacities.

Share of Local Own Revenues in Total Revenues

32

Table (4-6) below presents the share of own revenue in total revenue ofdifferent localities as average of the period (2008-2010).

Table (4-6): Average (2008-2010) of Own Revenue (in Mill. SDGs) and its Sharein Total RevenuesLocality Own Rev. Total Rev. % of Total Rev.Gadarif Town 5.71 11.94 48East Gallabat 1.51 4.16 36West Gallabt 0.4 2.64 15Rahad 1.64 3.54 46Fao 0.96 3.54 27Fashaga 0.59 2.44 24Butana 0.62 1.54 40Gadarif Centre 0.5 3.37 14Gala Elnahal 0.33 1.41 23Gurreisha 0.27 1.44 19Basonda 1.05 1.08 97Mafaza 0.24 0.25 96Total 13.82 37.35 37%

Source: Calculated from data of Auditing Champers (2008-2010)

Table (4-6) shows that own revenues of localities of the statecontribute only by 37% in their total revenues on average of the period(2008-2010) suggesting the higher dependence of localities ontransfers from the state. The table also indicates the larger variationsbetween different localities in their own revenue shares. For example,Gadarif Centre and West Gallabat localities collect only 14% and 15%of their total revenues respectively while Basonda and Mafaza collect97% and 96% of their total revenues respectively.

33

In general, the weak performance of local revenues reflected in failureof most of localities to perform their expenditure responsibilitiestoward their constituents.

Local Own Revenue Response: A Cross-Section AnalysisTo investigate the local own revenue response to revenue sharing andother socioeconomic variables, a cross – localities data of transfersand populations of the period (2008-2010) used to the own revenue todetermine how these variables affect the own local revenue. To carryout this purpose the following equation will be attempted:

tLogPopLogTransLogOrev 210

WhereOrev : Local Own revenueTrans : Transfers received by localities from the statePop : Population of different localities; and : The error term

Table (5-6) below presents the results of estimated equation definedabove.Table (5-6): Results of own revenue equation estimation of the period (2008-2010)DependentVariable

IndependentVariable

Coefficient T-Value Sig.

R2 F Change

Log Ownrevenues

(Constant) -8.3 -2.5 -.03 0.51 4.59*

Log transfers -0.11 -0.7 0.51Log Population 1.6 2.5 0.04

Source: Own calculation* significant at 5%

Results reported in table (5-6) above reveal that populations inlocalities affect significantly the local own revenue with higher

34

elasticity (1.6) indicating that the higher size population localitiescollect higher revenues than those with small populations.

With reference to the state transfers, unsurprisingly, the results showthe higher insignificance to the local own revenues. This result can beattributed to the reality that the state transfers to localities are mostlydirected to wages and salaries than to other purposes.

On another aspect the results show that only 51% of variations in theown revenues caused by variations in transfers and populationsindicating the exclusions of other importance variables for the poordata at local level.

Local Fiscal ImbalanceVertical Imbalance in Local LevelIt measures the degree of disparity between revenue sources andexpenditure needs. The importance of this indicator stems from thatin most federations, sub national governments' revenue capacities areun sufficient to perform their responsibilities. The table belowpresents vertical imbalance at the local level during the period (2008-2010):

Table (6-6): Own Revenues & Total Expenditure and Local Vertical Imbalanceduring (2008-2009)DescriptionYear(1)

Own Revenues(Mill. SDGs) (2)

TotalExpenditure(Mill. SDGs)(3)

Imbalance(4)= (2/3)

VerticalImbalance %(1-4)%

2008 11.28 79.31 0.14 862009 13.28 85.47 0.16 842010 14.34 89.01 0.16 84Average 12.97 84.6 0.15 85Own Calculation

The calculated coefficients of fiscal vertical imbalance in table (6-6)suggest that the ability of the localities to finance their currentexpenditures from their own sources of revenues has shown a veryweak sign i.e. the average of vertical imbalance coefficient is 85%during the period (2008-2010) showing the higher dependence oflocalities on state government which is also highly dependent onfederal government as shown before.

Horizontal Imbalance: (Cross-Localities' Regression Analysis)In this context, the system of state transfers to different localities willbe examined on equity ground as there are many standards used inworldwide. These standards are: population size, fiscal capacity,human development indicators and security situations. Forlimitations of data in local level, only two variables will be used in thefollowing model. The state transfers (Trans ) are used as dependent

35

variable while own revenues ( vO Re ) and populations ( Pop ) of differentlocalities used as predictors:

tPopvOTrans 210 Re

OLS technique used to the log form of the described model to estimatethe coefficients of the predictors. Results of the regression are shownin the table below:Table (7-6): Results of transfers' equation estimation of average of the period (2008-2010)DependentVariable

IndependentVariable

Coefficient T-Value Sig.

R2 F Change

Logtransfers

(Constant) -17.8 -2.95 0.02 0.58 6.18*Log OwnRevenues -0.21 0.69 0.51

Log Population 0.89 2.96 0.02Source: Own calculation* significant at 5%

Results in table (7-6) reveal that the state transfers are significantlyresponding to the population sizes in different localities. Thus, thetransfers increase by 0.89 SDG per every one increase in populations.With regard to the own local revenue, it is found that the statetransfers found insignificant to it indicating that the system oftransfers from the state to the localities is not reflecting the revenuecapacity of the localities violating one of the main pillars of transfers'standards. The results also show that, referring to the goodness of fitof the model, only 58% of the variations in transfers is caused by thevariation in population and own revenues and the remaining causedby other variables not considered in the model for data limitation.

7. ConclusionThis study aimed at evaluating the experience of fiscaldecentralization of Gadarif state at both state and local levels in theperiod (1998-2010) in the state level and (2008-2010) at the locallevel. For these purposes, expenditure decentralization, revenuedecentralization, and fiscal imbalance of both state and local levelanalyzed in the context of fiscal decentralization objectives. To achieveobjectives of the research, different methods have been utilized.Indicators of revenue effort and fiscal imbalance calculated to evaluatethe performance of revenue and expenditure of the two governmentlevels in terms of fiscal autonomy and fiscal imbalance. Time seriesregression of data of the period (1998-2010) in the state level andcross-localities regression of data of the period (2008-2010) carriedout to investigate the response of revenue, expenditure and transfersto their different arguments.

At the state level results of the research reveal that fiscal situations ofthe state gone worse and worse after implementation of fiscaldecentralization system in 1995. Thus, no fiscal autonomy acquired at

36

the state level as the federal transfers constitute about 65% of thetotal state revenues in 2010 and the revenue effort reported only 7%as average of the period (1998-2010) and the vertical imbalanceaveraged of 50% in the same period. The regression results alsoindicates that state revenues is not responding to the federal transfersand the local own revenue stimulates the local expenditure

At the local level, results of the research explain that, expenditureassignment analysis show that local expenditure is mostly devoted toonly wages and salaries than to other channels. The cross-sectionanalysis of horizontal equity reveals that the state transfers systemseems not reflecting the need standards such as the revenue capacity.

The overall implications of this study for state level are as follows: thestate is negatively impacted by the implementation of fiscaldecentralization resulted in higher dependence on the federaltransfers (about 65% of total revenues in 2010), the weak revenueeffort and vertical imbalance indicated by the very low coefficients 7%and 50% respectively and the failure of transfers to induce the ownrevenues.

With regard to the local level, the study came out with very valuableresults that the localities failed to collect sufficient resources toperform their responsibilities of delivering basic services and it isfound that the transfers system of the state to the localities is notclear and not reflecting the theoretical standards, especially the localrevenue effort.

To promote the poor situations of revenue and expenditure of the twogovernment levels in Gadarif state, emphasis should be directed todifferent aspects. These policy measures are:

- Revenue administrations should be trained and empowered toincrease the own revenue to acquire fiscal autonomy.

- Provision of detailed information about the different revenuesources bases to set achievable revenues in the budget.

- Development of clear formula for the transfers to localities.- Local administrations should be clearly assigned their revenues

and expenditure responsibilities.- Setting standards and requirements for establishing localities.- Directing the transfers to productive channels.

9. ReferencesBahl, Roy (1999) “Intergovernmental Transfers in Developing countries:Principles and Practice” World Bank Institute, Intergovernmental FiscalRelations & Local Financial Management Program – Topic 8.________ (1999) “Implementation Rules for Fiscal Decentralization”International Studies Program, Working Paper 99-1Bell, Michael E and Ahmed, Medani M (2005) " FiscalDecentralization in the Sudan: Concepts and Challenges" George

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Washington Institute of Public Policy, the George WashingtonUniversity, Working Paper No 10.Bird, Richard (2003) “Asymmetric Fiscal Decentralization: Glue orSolvent?” International Studies Program – Working Paper 03-09 April2003Brixiova, Zuzana; Gemayel; R. Edward and Said, Mona (2003) “CanFiscal Decentralization Contribute to Poverty Reduction?” Topics in MiddleEast Northern African Economics, electronic journal- Volume 5Boadway, Robin and Shah, Anwar (2007) “Intergovernmental FiscalTransfers: Principles and Practice” World Bank, Public SectorGovernance and Accountability Series.Comprehensive Peace Agreement, 2005Dahlby, Bef (2005) "Review of the Canadian Equalization and TerritoriolFunding System"Davoodi, Hamid and Heng Fu Zou (1998) “Fiscal Decentralization andEconomic Growth: a Cross Country Study” journal of Urban Economics,Volume 43.de Mello, Luiz R. (2000) “Fiscal Decentralization and IntergovernmentalFiscal Relations: A Cross-Country Analysis”World Development,Vol. 28,No. 2de Mello, Luiz and Barenstein, (2001) “Fiscal Decentralization andGovernance : a Cross-Country Analysis" IMF Working Paper NO 01/71de Mello, Luiz and Kichiro Fukasaku (1999) “Fiscal Decentralizationin Emerging Economies: Governance Issues” Paris: Inter-AmericanBank/Development Centre of the Organization for EconomicCooperation and Development.Ebel, Robert and Yilmaz, Serdar (2002) “On the Measurement andImpact of Fiscal Decentralization” Policy Research Working PaperNo.280, World Bank Group.Elbadawi, Ibrahim and Kabbashi Suliman (2008) “Toward anEquitable Intergovernmental Transfer System for the Sudan” inAbdelrahman, Saif eldin D, ed.: Generating Growth and Making FiscalDecentralization Works in Post-Conflict Sudan – Ministry of Financeand National Economy, Sudan.Elbattahani, Atta (2008) "Fiscal Federalism and InstitutionalDevelopment: Analyzing the Conundrum of De-centering the Centre in PostConflict Sudan" in Abdelrahman, Saif eldin D, ed.: Generating Growthand Making Fiscal Decentralization Works in Post-Conflict Sudan –Ministry of Finance and National Economy, Sudan.Elhiraika, A. B (2007) " Fiscal Decentralization and Public ServiceDelivery in South Africa" Trade Policy Centre , work in progress No. 58 –Economic Commission for AfricaElshibly, M. Medani (1990) “Fiscal Federalism in Sudan” KhartoumUniversity PressGangi, Yagoub and Ibrahim, Gamal (2008) "Institutionalist Perspectiveon Decentralization in Sudan" in Abdelrahman, Saif Eldin, ed. "Generating Growth and Making Fiscal Decentralization Work in Post-ConflictSudan" Ministry of Finance and National Economy, Sudan.Mila, Goodspeed, McGuire (2002) “Fiscal Decentralization Policies andSub-National Government Debt in Evolving Federations”

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Musgrave, Richard A and Peggy B. Musgrave (1984) ““FiscalDecentralization and” McGraw-Hill New York.O’Dwyer, Conor and Daniel Ziblat (2006) “Does Decentralization MakeGovernment More Efficient and Effective?”. Commonwealth &Comparative Policies, Vol. 44 1-18 NovOates, Wallace (1999) “An Essay on Fiscal Federalism” Journal ofEconomic Literature Vol. 37________ (1972) “Fiscal Federalism” Harcourt, Jovanovich