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140 Diagnosing Corruption in Ethiopia
Box 4.2
The Intergovernmental Fiscal Transfer Formula: Dividing
Money Fairly among Regions
A new formula for allocating the federal government’s “general purpose” grants
to individual regions was introduced in 2007. The new formula has three basic
principles, or objectives:
• Ensure that all Ethiopians are entitled to a similar range and level of service
delivery.
• Make the transfer independent of regions’ tax efforts or expenditure levels
(effort-neutral).
• Ensure that regions that are forced to spend more than the “standard
expenditure”—for example, because of their dispersed populations or
entrenched poverty—are entitled to budgetary support.
Variables included in the formula are population; differences in relative
revenue-raising capacities; differences in relative expenditure needs (to meet
basic needs, including water); and performance incentives. The approach strives
for equal per capita distribution of grants while considering the regions’ needs or
capacities.
The formula has been the subject of intense negotiation. However, it has been
agreed to and accepted by the regions and provides clear criteria for allocating
funds.
Source: World Bank 2009.
off-treasury. Disbursement and reporting systems vary but are generally
viewed as efficient and low-risk.
A subject of considerable debate is the allocation of regional block
grants (through Channel 1) to lower levels of government, in particular
allocations for rural water supply. Ethiopia’s federal system gives regional
states a high degree of autonomy over their public finances, and it is difficult
to track levels of funding for different services—including rural
water supply—at lower levels with precision (World Bank 2009). In practice,
the discretion afforded to regions over the allocation of block grants
is limited by existing commitments, capacity, and staffing levels. Public
sector salaries set at the federal level absorb a major proportion of the
grants: More established regions (Oromia, for example) tend to devolve