US embassy cable - 05COLOMBO1315

UNCLAS SECTION 01 OF 03 COLOMBO 001315 
 
SIPDIS 
 
DEPARTMENT FOR SA/INS 
 
E.O. 12958: N/A 
TAGS: PGOV, ECON, EFIN, CE, LTTE - Peace Process, Political Parties 
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 
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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