CASE STUDY

Efficient and effective

municipal tax administration:
a case study of the Kampala
Capital City Authority

Fred Andema Astrid R.N. Haas

Kampala Capital City Authority International Growth Centre
Ag Director Revenue Collection Manager of the Cities that Work
Services Initiative and Senior Country
Economist for Cities

DIRECTED BY FUNDED BY
FRED ANDEMA

Fred Andema is the Ag Director Revenue

collection services at Kampala Capital City
Authority where he is responsible for a wide
range of programs including but not limited
to developing & reviewing tax policies and
coordinating the revenue collection function
so as to mobilize appropriate levels of Revenue
to effect service provision in the City. Fred
Previously worked as a Finance manager in
the Directorate of Treasury services and as an
Accountant at Uganda Revenue Authority and
later moved to the National Water & Sewerage
Corporation in 2008 as a Finance Manager. He
holds a Master’s degree in Economic Policy
Management and is a fellow of the Association
of Chartered Certified Accountants (ACCA) of
the UK. He is also a member of the Institute of
the Certified Public Accountants of Uganda and
serves on Boards and Finance committees of
a number of organizations as well as teaching
at the College of Business and Management
studies of Makerere University.

E: [email protected]
The literature on improving tax revenue focuses on five particular
characteristics of what an effective tax system should incorporate, namely;
economic efficiency, administrative simplicity, flexibility, transparency and
fairness (Stiglitz and Rosengard 2015). To achieve this, many governments and
local authorities focus on trying to affect larger policy and legislative changes to
reform the tax system.

However, effective initial modifications can be made through relatively simple Effective initial
and in some cases low-cost alterations to administration structures . This is modifications can
particularly the case in places where there is low compliance from existing be made through
tax bases, a feature that currently describes many developing countries. A relatively simple
further benefit from initially focusing on tax administration, is that many and in some cases
of the potential administrative modifications can be introduced at any level low-cost alterations
of government that handles any type of tax collection. This is in contrast to to administration
policy and legislation changes that may sit solely under the purview of one sole structures
national authority. Finally, alterations to tax administration can be quicker, less
tedious and therefore show results in a relatively short term.

To illustrate the potential impact of tax administration reforms, this policy

note focuses on the case study of the Kampala Capital City Authority (KCCA).
Until 2011, there were significant impediments to administration of municipal
revenues in Kampala, including unreliable manual databases, poor technologies,
unclear procedures, a narrow tax base and poor collection procedures. This
resulted in extremely low revenue collections and poor tax morale. Like most
local authorities, the KCCA faces a number of constraints in undertaking
large-scale legislative reform to support its effort in raising more own-source
revenue, since much of the reform has to be managed at a national level and can
be a long and cumbersome process. Therefore, the KCCA, from its inception,
decided to start by focusing on the areas that it could influence and that could
bring short term results. Through such reforms, the KCCA managed to increase
its own-source revenue by more than 100% in four years. These reforms,
centred around the four main areas of effective tax administration (Bird 2010,
Freire and Garzon 2014):
Through reforms to
1 Better identification of taxpayers;
revenue adminsitration,
the KCCA managed
2 Transparent process in assessing their liabilities;
to increase its own-
source revenue by
3 Effective billing and collection;
more than 100% in four
years
4 Facilitating and monitoring compliance as well as dealing
with non-compliance.

An effective enabling environment for reform

From the outset, implementing any reform will require sufficient political buy-
in. With improvements to tax administration, it is particularly important that
such reforms are acknowledged as a central component to tax reform and is
actively pushed from the highest political levels, as otherwise it is a commonly
neglected area of reform (Bird 2010).

3 — EFFICIENT AND EFFECTIVE MUNICIPAL TAX ADMINISTRATION: A CASE STUDY OF THE

KAMPALA CAPITAL CITY AUTHORITY
For the KCCA, an Act of Parliament in 2010, which replaced the Kampala City
Council (KCC) with the current Kampala Capital City Authority (KCCA) and
resulted in a number of further associated governance changes, provided this
necessary enabling environment for reform. In particular:

——The position of the Executive Director (ED), who is appointed directly

by the President, was created as part of the legislation. The appointed
ED, Dr Jennifer Musisi, had previously been working as part of senior
management in the Uganda Revenue Authority (URA), the national
tax body. Therefore, she brought with her a solid understanding of tax
administration and its necessity for supporting revenue collection efforts
in the city.

——As part of the initial re-organisation from the KCC to the KCCA, a
further decision was made to create an independent Directorate of
Revenue Collection (DRC). In most cities and local authorities, this
function is merged with expenditure, where the latter function is often
given priority over the former. By splitting the functions within the
KCCA, this Directorate could concentrate solely on its mandate of
revenue collection and further supported the enabling environment for
reform.

Reforms to address key challenges to revenue administration focused on four

key areas:

Internal staffing and skills

For the DRC to operate effectively, it had to be staffed with a critical mass of
qualified staff (Kopanyi 2015). When the KCCA was initially founded, the ED
was given the opportunity to recruit a number of staff to build the foundation
of the organisation. Given her previous work in the URA, she appointed a
number of staff who had worked with her in the same agency. Other staff
were recruited from a number of technical directorates in other ministries,
departments and agencies. The Directorate is currently staffed with more than
100 contract and permanent staff, working across three departments of the
Directorate, namely Audit and Compliance, Research and Analysis and Revenue
Collection.

Currently, all the Directorate’s staff receive monthly training and refresher
courses on tax and operational guidelines. Furthermore, there is the assurance
that the staff have the basic on-the-job training in tax law, and changes in tax
laws are subsequently incorporated as part of the training. This structural
re-alignment and allocation of a cadre of competent and skilled staff thus
provided the groundwork to introduce further reforms in the municipal tax
administration.

Providing an adequate cadre of qualified staff to the Directorate as well as re-

organizing its functions and providing on-going skills training, has been key in
ensuring that administration reforms are sustainable over time.

4 — CITIES THAT WORK

Key Stages of Reform
Following the creation of the KCCA there were a number of reforms that
were undertaken in a phased approach, as illustrated by Table 11. Each of the
important stages are further elaborated as part of this brief.

Year Major Milestone Rationale

2011 Restructuring of the Kampala City Council to Separate out and streamline the
the Kampala Capital City Authority. structure of the revenue collection for
the city.
Established a Directorate of Revenue Collection.
Evaluated the performance of outsourced
revenue contracts
2012 Conducted an assessment of revenue To identify efficient performing
administration. revenue lines and contracts.
Introduced a massive taxpayer
Undertook mass taxpayer identification
education and sensitisation
programme.
2013 Procured an electronic revenue management To ameliorate the negative
system (e-Citie) consequences of having manual
systems.
Introduced mobile money payments for tax.
Introduced a debt collection strategy
2015 Established a large taxpayer office with an audit Re-establishing a focus on the five
function. main revenue sources and the top tax
payers.
Institutionalised debt collection.
2016 Embarking on a computer based mass To replace old expired valuation rolls
registration and valuation of properties in (the last full valuation was carried out
Kampala. in 2005).
Start exploring alternative financing
mechanisms.

Digitised databases
Where administration reforms have been effective in other contexts, there has An electronic revenue
There are a number of disadvantages in manual tax administration, such as management system,
delays in reconciliation of client ledgers, error-prone billing systems, and overall eCitie, allowed for
poor service delivery for the client (Sserunkuuma, 2016). The KCCA, therefore, automatic billing,
decided to introduce digitisation alongside an overall effort to improve reconciliation, and
service delivery through automation of revenue collection. To do this, they generation of receipts,
implemented an electronic revenue management system, eCitie, that allowed and sent out a reminder
for automatic billing, reconciliation, and generation of receipts, and that sent to taxpayers when they
needed to pay their
bills
1 Adapted from Musoke, P. (2017) Kampala Financial Recovery Journey. Presentation given in
Hargeisa, Somaliland – October 2017.

5 — EFFICIENT AND EFFECTIVE MUNICIPAL TAX ADMINISTRATION: A CASE STUDY OF THE

KAMPALA CAPITAL CITY AUTHORITY
out a reminder to taxpayers when they needed to pay their bills. At the back-
end, the system generated management reports for the Directorate and could
automatically flag which taxpayers were in arrears.

As part of the system, the city rolled out its own taxpayer identification
numbers. Although there is already an existing system of national tax
identification numbers in Uganda, there is a very low registration rate. The
KCCA noted that if they relied on this, they may be restricting their tax
base. Therefore, the online system allowed for an automatic generation of a
number as soon as any client registered with the system. This number gives the
taxpayers access to their accounts which they can recall to understand which
payments they need to make and when. Furthermore, given that in a developing
country city like Kampala, there is no guarantee that people will be able to
access the internet, the account can be accessed via mobile phone through
sending an SMS. All this information feeds into an overall revenue database
that has replaced manual record keeping. The KCCA estimates that through
this reform alone, it was able to double its revenues from Commercial road user
fees from 800 million UGX (over 222,000 USD) to over 1.6 billion UGX (over
444,000 USD)

This system itself required an upfront capital investment of about USD 2.75
Million (approximately UGX 9.9 billion). However, it is important to highlight
that in procuring the system, the KCCA opted for one with open source code.
This way an in-house technical team could operate, fix and further develop
the system according to the KCCA’s future needs. This has reduced the overall
future cost as it has meant they are not tied to any specific supplier’s services
and eliminated the need for annual subscription fees.

It is important to note that simply digitising payment systems will not

automatically make the tax administration more effective. On the contrary, if it
is too complex and not appropriate for the existing organisational structures,
it can actually have adverse effects on collection. There is therefore need to
continuously review and streamline the relevant forms that are required to
ensure they remain appropriate for the new systems.

Finally, it is critical that those who are meant to use the system are trained to
use the technology in the most optimal way possible, ensuring that it becomes
a support rather than a burden to the overall system. This is a core part of the
KCCA’s training programme.

In–house revenue collection

With well-trained and qualified staff, revenue collection was brought in-house,
having previously been outsourced to individual contracting firms. To effect
this from the outset, the Directorate decided to cancel all existing out-sourced
contracts (Kopanyi 2015). However, the applicability of this reform in other
contexts may vary. Research has clearly shown the benefits of separating
the function of any entity that is collecting taxes, so that there is as much
autonomy as possible between officials dealing with the revenue and those who
are spending the taxes (Bird 2010). However, there is debate in the literature

6 — CITIES THAT WORK

on whether outsourcing or conducting revenue collection as part of a local
authorities’ primary function is preferable.

In Kampala, the lack of oversight of the outsourced contractors was a major

source of leakage in revenue, coupled with weak contracts. This led to the
decision to carry out collection in-house.

The taxpayer as the client

One of the biggest challenges that the KCCA faced in tax administration
reform, aside from re-equipping the staff with the appropriate skills and the up-
front capital investment, was re-engaging taxpayers and getting them to use the
system. Tax morale was low in the city due to the years of corruption and the
overall efforts that were needed to meet their tax obligations.

Where administration reforms have been effective in other contexts, there has
been a shift in organisational focus towards viewing the taxpayer as a client
who requires good services (Bird 2010). The better the service provision, in the
form of simple and transparent payment mechanisms, the more likely taxpayers
are to comply, as it becomes more convenient for them to do so.

This view has been adopted by the KCCA as well. From the outset, they carried
out extensive evaluations to understand what influenced tax payer behaviours,
such as economic factors, which businesses they worked for and their level of
education. Then they worked on segmenting taxpayers by their attitudes to
compliance and using this to assess what interventions would be required to
ensure compliance. The more taxpayers willingly comply with the system, the
less effort and cost will be needed for enforcing compliance (see diagram 1).
The KCCA’s strategy was to focus on meeting the needs of the widest base of
those who were willing to comply and then progressively work towards the
more difficult strata.

REVENUE COMPLICANCE STRATEGY

High Effort

Have decided not to comply Use full force of law

Do not want to comply Deter by detection

Try to comply but do not

Assist in complying
always succeed

Willing to comply if they Make systems easier to

know how comply

ATTITUDE TO COMPLIANCE COMPLIANCE STRATEGY

Low Effort

7 — EFFICIENT AND EFFECTIVE MUNICIPAL TAX ADMINISTRATION: A CASE STUDY OF THE

KAMPALA CAPITAL CITY AUTHORITY
For example, the Directorate implemented services that included being able to
pay taxes through instalments, which made it more affordable to some of their
clients. Through a review of their data, they noted that approximately 70% of
their revenue was actually being generated by 20% of their clients. Therefore,
to support them, they set up a dedicated office for large taxpayers that provide
premium services. This office provides dedicated relationship managers for each
of the payers.

To widen their tax base, the Directorate of Revenue Collection has also
instituted a number of communication campaigns. These focus on helping
the taxpayer understand why paying taxes is important to the city and how
their taxes are being spent. After seeing an increase in voluntary compliance,
these targeted communications and overall taxpayer engagement have been
streamlined within the Directorate’s annual plans.

Underlying conditions for success

Underlying the success of these reforms were three key enabling conditions:

1 An enabling environment for reform, with the necessary understanding of

the importance of revenue administration reform and how this could be
achieved, and the needed political backing to achieve these.

2 Adequate resources for cost-effective administrative reform.

Substantial investments have been required in Kampala to raise administrative Up-front capital
capacity, bring collection in-house and invest in new systems. However, these investments to increase
up-front capital investments to increase collection have been largely recovered collection have been
through higher revenues within one year (Kopanyi 2015). largely recovered
through higher
At the same time, the DRC’s costs of operation increased from 1.1% in 2011 revenues within one
to 11.21% of collection by 2014 (Kopanyi 2015). Though this is an extremely year
large increase in costs, and further reforms are still needed to reduce costs of
collection, resultant improvements in revenue collection mean that the KCCA
has now moved from a low cost but unsustainable revenue collection to a
higher cost sustainable system.

3 Realistic reforms: a focus on main revenue sources and incremental

reforms
The KCCA started by
Simplification and streamlining of procedures is a key component of improving identifying the major
tax administration and thus increasing revenues collected. They started by sources of revenue.
identifying their top major sources of revenue and those which were more They termed this
efficient in terms of cost of collection. They termed this their 80:20 strategy, i.e. their 80:20 strategy,
identifying the top sources that were generating 80% of their revenue. They - identifying the top
decided to focus on enhancing these at the same time as reducing the overall sources that were
number of taxes they were collecting, which at the time was more than 20 generating 80% of their
different ones. revenue

8 — CITIES THAT WORK

Having a large number of small taxes is often a defining characteristic of
developing country municipal systems. This is done with little consideration
that the costs of collecting each of these taxes both for the authority and the
tax payer are relatively high and the efficiency relatively low. Furthermore,
the larger number of taxes are collected, the increased nuisance these may be
to the tax payer and may reduce their willingness to comply overall. When
implementing modifications to tax administration, it is important to ensure that
all costs are taken into account: both the cost for the entity administering the
tax as well as the cost of compliance for the taxpayer. Additionally, all reforms
will have to adequately acknowledge the fact that tax administration in itself
represents a complex interaction between public and private actors (Bird 2013).
Therefore, just implementing new taxes does not mean that automatically
revenue will increase. Therefore, the strategy to focus on the top yielding
revenue source was to benefit both the authorities, reducing their costs of
collection, and the tax payers, to reduce their costs of compliance.

Additionally, in order to sensitise the staff and ensure the reform was successful
and any glitches could be handled effectively, the eCitie platform was rolled
out incrementally. The platform was purchased in 2012, and it took a year to
fully be implemented. Following this, the KCCA progressively rolled it out for
different payments, prioritizing those that had the highest revenue potential
and where they had noted there were the most arrears. Therefore, they started
with digitising the commercial road user fees, followed by trading licenses and
one time payments. The current stage, expected to be completed by the in 2017,
includes local hotel fees, local service tax and outdoor advertising.

Future Reforms
The outlined reforms helped KCCA to increase its own-source revenue by
over 100% from less than 40 billion UGX (approximately 11 million USD)
in 2011/12 to 85 billion UGX (approximately 23.5 million USD) in 2014/15
(Kopanyi 2015). By comparison, most local authorities in developing countries
would look at a 10% increase per year, (or 46% compounded increase over
four years) as a success (Kopanyi 2015). This impressive growth was achieved
without changing any legislation or policy; rather the focus of the KCCA’s
initial reforms were solely in the realm of tax administration. Although the
KCCA went through a series of reforms, each of these individually contributed
to the increase in revenue and can be used as an example by other cities on how
tax administration can be reformed. Therefore, it offers an example of how a
developing country municipal authority can shift to adopting administration
and procedures comparative to most developed countries and through this be
able to sustainably increase its revenues.

The KCCA is continuing to implement administrative reforms for enhancing

revenue collection. Some of these improvements, such as establishing a
computerised fiscal cadastre, are to support larger reforms that are taking place
within land and property tax systems. Others, such as the current rollout of a
street addressing system, will be an important component in expanding in the
city’s tax base (Freire and Garzon 2014)

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In Summary
The case study of the KCCA underscores the importance of improvements in
administration efforts to increasing overall revenue. Furthermore, such reforms
are in general easier for authorities to implement and can usually be done even
when they may not have the power to influence policy and legislation.

Reforms in any area, including tax administration, will require an enabling

political environment to implement . Furthermore, such reforms are one-off
measures and therefore will not provide continued increases in revenue over
time. Therefore, in the medium to long run, local authorities will also have to
engage with reforming tax policy as well as addressing institutional and legal
constraints to their efforts in order to ensure continued increases in municipal
revenues.

REFERENCES

Bird, Richard (2013) “Foreign Advice and Tax Policy in Developing Countries.”
Working Paper 13-07 Atlanta: Georgia State University International Center
for Public Policy
Bird, Richard (2010) “Smart Tax Administration.” Economic Premise No 36.
Washington D.C.: World Bank
Freire, Maria Emelia, and Garzon, Hernando (2014) “Chapter 4: Managing
Local Revenues.” In Farvacque-Vitkovic, Catherine and Kopanyi, Mihaly
Municipal Finances – A Handbook for Local Governments. Washington
D.C.: World Bank
Kopanyi, Mihaly (2015) Local Revenue Reform - Kampala Capital City
Authority. London: International Growth Centre
Sserunkuuma, Samuel (2016) “Incorporating Technology in Municipal Revenue
Mobilization.” in The East and Central African Cities’ Development Forum
Event Report. Kampala: Kampala Capital City Authority
Stiglitz, Joseph and Rosengard, Jay K. (2015) “The Five Desirable
Characteristics of Any Tax System.” In Stiglitz, Joseph and Rosengard,
Jay K. Economics of the Public Sector, 4th Edition London and New York:
W. W. Norton and Company