Financing Municipal Services

Zemelak A Ayele, CFGS – Centre for Federalism and Governance Studies, Addis Ababa University

Relevance of the Practice

Local government functions in Ethiopia are in general categorized into state functions and municipal functions. State functions are those that are linked with provision of basic services such as education and health care. These are identified in the various poverty reduction policies as areas of policy intervention. Rural woredas are expected to be the center of state service delivery.[1] Cities are also expected to provide state services to their residents. Besides, they are expected to provide municipal services which are typically services that are available or are expected be available in urban areas. Such services include cultural centers; recreational centers; youth centers; museums; sewerage; streets; street lighting; land administration; solid wastes; fire-fighting, nurseries, care centers (for the aged, disabled, orphaned or homeless children); pollution control; abattoirs; parks; markets; sanitation; liquor licenses; and ambulance services.[2] Cities are expected to deliver these services. The schemes through which municipal functions or services are financed differ from the way state functions are financed. This report entry examines how and why municipal functions are treated differently in terms of finance. 

Description of the Practice

The 1995 Federal Constitution is completely silent on how local government would be financed. This is not surprising given that local government is within the exclusive competence of the states, with barely any constitutional mention. What is rather surprising is the silence of the state constitutions on sources of revenue of local government. None of the ten state constitutions allocate financial sources to local government. Indeed, there is a provision in each state constitution which provides that woredas could utilize sources of revenue that the state has not begun utilizing. This not only is unclear but also meaningless. Thus, until about 2000, local government did not have any clear source of revenue. Moreover, it could not adopt its own budget but needed the approval of the relevant state. In 2000, the federal government adopted a poverty reduction policy which aligned with the Millennium Development Goals. In the policy paper it was stated that local government would play a central role in poverty reduction. To this effect, states were required to transfer, as unconditional grants, about half of what they receive from the federal government in the form of federal transfers. Since then, states transfer unconditional and conditional grants to woredas. The states have also legislatively authorized woredas to collect certain revenues in the form of land use fees, agricultural income tax and the like. In any case, woredas depend for over 75 per cent of their income on state transfers, over 90 per cent of which they use to cover their recurrent budgets.

As for the financing of their services, the two federal cities, Addis Ababa and Dire Dawa, are authorized by federal laws to raise revenue from various sources, as they do not fall within the jurisdiction of a state.[3] For instance, they collect a tax on their employees’ income and on income earned from agricultural activities, as well as profit, excise and turnover taxes from individual traders working in the cities. They also collect revenue related to properties in the city and user charges, for example, on vehicles. As a result, Addis Ababa covers almost 97 per cent of its total expenditure from its own revenue. The two cities in general rely on revenue they generate from the sources listed above. In general, they do not receive unconditional grants from the federal government. Hence, Addis Ababa reportedly covers over 97 per cent of its expenditure form own revenue. The so-called regional cities – those which are within the jurisdiction of one of the states and which are over 100 in number – are treated differently from the rural woredas in as far as they do not receive unconditional grants. Instead, they are given earmarked grants for discharging their state functions. Even the grants for the state services are not formula-based block grants.[4] Rather, ‘they are determined on an “ad hoc” basis with a view to financing the recurrent costs of the state functions of the cities’.[5] They are thus left to cover the costs of providing municipal services from their internal sources of revenue by collecting user fees from those who make use of the services.[6]

Assessment of the Practice

Why the different treatment of state services and municipal services? One explanation is that the federal government, in its policy on poverty reduction, considered the so-called state services as important intervention areas for poverty reduction. It did so because over 90 per cent of those who live in absolute poverty are found in rural areas. This might have been the reason why the there was a focus on rural areas and state functions in terms of finance. The other explanation might be ideological. The former ruling party, the Ethiopian People’s Revolutionary Democratic Front (EPRDF), considered itself a vanguard of the marginalized rural population and rural areas as it saw the rural areas, where over 80 per cent the Ethiopian people live, as its support base. After losing elections in many urban centers in the 2005 election, the EPRDF had attempted to give attention to urban areas. It was after this election that the first policy on urban local government was formulated in 2007.[7]

References to Scientific and Non-Scientific Publications

Legal Documents:

Oromia Regional State Proclamation no 65/2003

Amhara Regional State Proclamation no 91/2003

FDRE Proclamation no 361/2003, Article 52

FDRE Proclamation no 416/2004, Article 43

Afar Regional State Proclamation no 33/2006

SNNPR Proclamation no 103/2006

Ministry of Finance and Economic Development (MoFED), Ethiopia: Sustainable Development and Poverty Reduction Program (SDPRP)’ (2002)

Ministry of Works and Urban Development, ‘Plan for Accelerated and Sustained Development to End Poverty (2005/06-2009/10): Plan for Urban Development and Urban Good Governance’ (2007)

Scientific and Non-Scientific Publications:

Garcia M and Rajkumar AS, Achieving Better Service Delivery through Decentralization in Ethiopia (World Bank 2008)

[1] See, for example, Ministry of Finance and Economic Development (MoFED), Ethiopia: Sustainable Development and Poverty Reduction Program (SDPRP)’ (2002).

[2] See, for instance, Art 8(2)(y and z) and (i-iii) of Amhara Regional State Proclamation no 91/2003; Art 16(7-10) of the Afar Regional State Proclamation no 33/2006; Art 13(6) of the SNNPR Proclamation no 103/2006; Art 2(8), Oromia Regional State Proclamation no 65/2003.

[3] See Federal Democratic Republic of Ethiopia (FDRE) Proclamation no 361/2003 Art 52 and FDRE Proclamation no 416/2004 Art 43.

[4] Marito Garcia and Andrew S Rajkumar, Achieving Better Service Delivery through Decentralization in Ethiopia (World Bank 2008) 24.

[5] ibid.

[6] Jan Werner and David Nguyen-Thanh, ‘Municipal Infrastructure Delivery in Ethiopia: A Bottomless Pit or an Option to Reach the Millennium Development Goals?’ (working paper 01-2007, Institute of Local Public Finance 2007) <>.

[7] Ministry of Works and Urban Development, ‘Plan for Accelerated and Sustained Development to End Poverty (2005/06-2009/10): Plan for Urban Development and Urban Good Governance’ (2007).