Literature review on local government financial performance measurement

Financial performance of local governments plays a critical role in ensuring the success of fiscal decentralization and sustainable regional development. As fiscal responsibilities shift from central to regional governments, the ability to measure and evaluate financial performance becomes increasingly important. This study synthesizes theoretical frameworks and empirical research to provide a comprehensive understanding of financial performance measurement in local governments. The metrics analysed include Locally Generated Revenue (LGR), Financial Ability Index (FAI), and fiscal independence. The study identifies key challenges in the measurement process, such as dependency on central transfers, variations in economic potential, and inconsistencies in financial reporting. It further explores the formulas and methodologies underlying these metrics, emphasizing their application in evaluating local fiscal health. Policy recommendations focus on standardizing metrics, enhancing technical capacity, and formulating innovative strategies to optimize revenue generation and ensure regional fiscal sustainability.