Identifier
Created
Classification
Origin
05COLOMBO1315
2005-07-28 10:59:00
UNCLASSIFIED
Embassy Colombo
Cable title:  

PROVINCIAL COUNCILS LACK FISCAL AUTONOMY TO

Tags:  PGOV ECON EFIN CE LTTE 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 03 COLOMBO 001315 

SIPDIS

DEPARTMENT FOR SA/INS

E.O. 12958: N/A
TAGS: PGOV ECON EFIN CE LTTE
SUBJECT: PROVINCIAL COUNCILS LACK FISCAL AUTONOMY TO
FULFILL RESPONSIBILITIES

Summary
--------------------------------------------- ------------

UNCLAS SECTION 01 OF 03 COLOMBO 001315

SIPDIS

DEPARTMENT FOR SA/INS

E.O. 12958: N/A
TAGS: PGOV ECON EFIN CE LTTE
SUBJECT: PROVINCIAL COUNCILS LACK FISCAL AUTONOMY TO
FULFILL RESPONSIBILITIES

Summary
-------------- --------------


1. (U) Provincial Councils PCs have limited revenue
generating capabilities and are dependent on the central
government for funding. Transfers to the PCs do not meet the
amount required to fulfill their responsibilities. Corruption
remains a widely recognized problem within the PCs.
Consequently, PCs are unable to complete their initial goal
of implementing local economic development programs. Their
duties remain administrative offering little empowerment and
political autonomy at the local level. END SUMMARY.

Devolution and 13th Amendment
-------------- --------------


2. (U) The minority Tamil community has often advocated
for devolution of power away from the central government. The
Tamils see devolution as a small step towards their larger
goal of political autonomy in the North and East. The current
PCs, were introduced to the country along with other
provisions for political empowerment of Northern and Eastern
Tamils, via the 1987 Indo-Lanka Accord. (Comment: As a
consequence, in the eyes of many Sinhalese, the PCs system is
linked unfavorably with Indian diplomatic pressure and Tamil
demands for autonomy. End Comment.)


3. (U) Nine PCs were established through ratification of
the 13th Amendment to the Sri Lanka Constitution. Currently
only seven of the PCs collect tax revenue. The North and
Eastern PCs have no revenue collection mechanisms as a result
of the civil war. (Note: The LTTE collect taxes that go
unrecognized by the central government. End Note.) PCs are
given primary local authority in law and order, education,
health, rural development, local services, and the
implementation of provincial economic plans. Provincial
police forces and civil services were to be set up to carry
out these functions, including a provincial court systems to
rule on subjects under the purview of the PCs. But police
forces have not been devolved.

Structure of PCs
-------------- --------------


4. (U) The PCs as a system of transferring power to local
governments, is a process of devolution rather than
decentralization. Local governments have limited
decision-making authority. The Governor, who is appointed by

the President, holds the executive power of each PC. The
Governor exercises his power directly through a Board of
Ministers appointed from the Provincial Parliament.
Provincial Parliament Members are elected by registered
voters. These elections are the only source of downward
accountability in the PC system. The financial
responsibilities of the PCs rest with the Chief Secretary who
is also appointed by the President. (Comment: The
institutional design creates a void of downward
accountability thus negating any benefits of
decentralization. Little chance for the intended benefits of
development through local participation remains. End
Comment.)


5. (U) PC expenditure is funded from central government
transfers and PCs tax revenue. All eight PCs are dependent
upon these transfers to fulfill their responsibilities. The
Finance Commission completes a needs assessment for every PC
based upon the previous year's expenditure and makes a
recommendation to the Ministry of Finance. According to Asoka

G. Gunawardena, the Finance Commissioner, the budgets are
often reduced by 3-5 percent resulting in under-funded PCs.


6. (U) The amounts transferred to each PC from the central
government is determined by a simple formula of previous year
expenditure minus expected tax revenue equals the government
transfer. This formula does not account for inflation.
Transfers to the PCs comprise 10 percent of central
government expenditure. Additional funding for projects at
local levels is distributed through the 44 line ministries,
creating redundancy within government design. The central
government uses the following four different transfer
mechanism:


A. Block grants are used to fill in the gap between
expenditure needs and tax revenue shortcomings. Funds from
the block grants are predominately used to fund salary
payments and administration duties.

B. Matching grants are used for capital expenditures.

C. Criteria-based grants are used for capital expenditures
as well.

D. Special Project Development Grants (SPDG) are used for
development projects.

Block grants account for 80 percent of transfer funds while
matching grants, criteria-based grants and SPDGs account for
the remaining 20 percent. The central government uses
matching grants to encourage revenue generation by creating
an incentive structure for increased tax revenue. Mr. A.
Wijetunga, a Development Assistance Specialist with USAID,
told Econoff that the matching grants scheme lack the funding
required to create an effective incentive structure.

Tax Collection
-------------- --------------


7. (U) The 13th Amendment stipulates that PCs are allowed
to collect taxes from a variety of points. The Business
Turnover Tax (1 percent),Stamp Tax, Motor Vehicle
Registration Fee and court fees generate the majority of PCs
revenue.(Comment: PCs lack the human resource capacity to
effectively collect taxes from all possible sources. End
Comment.) The PCs have limited revenue generation capacity,
as they are not allowed to create new forms of revenue.
Additionally, the financial infrastructure is not in place in
many rural areas to accommodate the record keeping needed to
facilitate taxation. The Western Province generates 67
percent of all PC revenue generation due to the high
concentration of commercial and industrial activities in the
Western Province. Only three other provinces have "major"
revenue collection.


8. (U) The PCs must seek the approval of Parliament in
order to increase taxes. H.K. Dayapema, Deputy Chief
Secretary of Finance for the Southern Provincial Council,

SIPDIS
told econoff and econ FSN that a number of PCs tried to raise
the Business Turnover Tax rate to 5 percent on some items
(e.g. liquor, cigarettes and electric items) but the central
government did not approve and the tax hike was revoked.
Dayapema said that PCs did not exercise their right to
implement the Betting Tax, citing strong lobbying pressure by
the gambling industry on the central government against the
tax. Additionally, any measure to create a new tax would need
to be approved by Parliament. To date the PCs have not
implemented any new taxes due to a lack of confidence in
parliamentary approval.

Limits on Expenditure
-------------- --------------


9. (U) Roughly 80 percent of the PCs budget is dedicated
towards recurrent expenditure; administration costs, salaries
and benefits. Salaries for the health and education sectors
account for 92 percent of PCs recurrent expenditure.
(Comment: The inability to leverage taxes coupled with the
lack of authority to borrow money independent of the central
government from international financial institutions limits
PCs fiscal autonomy. End Comment.)


10. (U) The PCs are responsible for funding the local
government system of 18 Municipal Councils, 37 Urban Councils
and 256 Pradeshiya Sabhas (village councils). (Comment: The
PCs were created to give decentralized powers to local
governments, but retain little autonomy in determining
expenditure distribution or fiscal capacity. End Comment.)
Finance Commissioner Mr. Asoka Gunewardena told econoff that
the PCs give stamp tax funds to the local governments. Mr.
Arif Ismail Mohamed told econoff and econ FSN the PCs are
forced to undercut the needs of the local governments as a
result of their own lack of funding, claiming that 40 percent
of the PC budget was lost to corruption and waste.

Corruption
-------------- --------------

11. (SBU) Claims of corruption against the PCs were
supported by every source interviewed. Press reports describe
the PCs as a "useless white elephant reeking with
corruption." The Finance Commission is responsible for
monitoring PC fiscal activities, but the Commission is "weak
and has no real power" according to Central Bank contacts.
(Comment: While at the Finance Commission, Embassy personnel
observed an office running on a minimal budget with few
modern technologies resulting in severely limited
capabilities. End Comment.) The Finance Commissioner admitted
to have little power to stop corruption and considered it a
serious problem in the PC system.

Comment
-------------- --------------

12. (SBU) The PCs were created as a mechanism to quell the
ethnic divisions in the country and used as a conflict
mitigation tool. They appear to be purposely under funded and
restricted more as a political power play than as the result
of a lack of human capacity at the local level. Sources
continually cited "politics" as the motivations behind the
lack of funding. Given the origins of the PCs, it is
difficult to imagine the central government providing the
necessary autonomy or fiscal capacity required for the PCs to
adequately serve their constituents even after reporting 22
percent gains in central government tax collection for the
first half of 2005. Additionally, Government of Sri Lanka
reports indicate that PCs will be expected to participate in
future disaster relief efforts, which seems ill advised due
to a lack of commitment towards PCs by the central
government. END COMMENT.
LUNSTEAD