Performance based financing, local government revenue and district assembly performance in Ghana: the case of MMDAs in Ashanti Region

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June 2016
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Decentralization is motivated to be the better way of allocating resources more effectively and efficiently because local governments have better information about the needs for and requirements of public goods in their jurisdictions. It is because local governments have a high degree of autonomy and use their discretion when it comes to resource allocation. The level of autonomy and discretion in resource allocation only rest on the local governments’ ability to generate its own local revenue (IGF) even though the budgets of local governments are dominated by external transfers/grants from the central government that are mostly tied to a specific expenditure item that may not match the priorities of the local government. A Performance Based Grant System (PBGS) called District Development Facility (DDF) under the Functional Organizational Assessment Tool (FOAT) was introduced into the local government system of Ghana where access to additional development funds is linked to an annual performance assessment under FOAT in 2008.Using local governments’ public finances (both revenue and expenditure form different sources) from the period 2011 to 2014 panel data of 30 MMDAs in the Ashanti region of Ghana and other local governments’ specific characteristics, this research work estimated the effect of District Development Facility on local governments’ own revenue generation (also called IGF)and further examined the effect of District Development Facility on MMDAs’ performance in terms of FOAT assessment. Estimated results show that, DDF was significantly and negatively associated with local governments’ own revenue generation which implies that DDF transfers/grants to MMDAs appeared to discourage rather than encourage local revenue generation or IGF. Also, evidence suggests that DDF transfers to MMDAs are likely to reduce MMDAs’ performance score. It is therefore recommended that, the Capacity Building grant component of the facility be used to revalue all landed and immovable properties of all MMDAs in to the country to aid in the collection of property tax.
A thesis submitted to the Department of Economics of the College of Social Sciences and Humanities, Kwame Nkrumah University of Science and Technology, in partial fulfillment of the requirement for the award of a Master of Science degree in Economics,