Ethiopia is exercising decentralisation of the health system and thus this study assesses lessons learned about the experiences of the decentralization of institutions in theoretical terms. The problem investigated in this study concerns the lack of institutional capacity to effectively provide services, lack of transparency, responsibility and accountability. Decision making is also very remote from the people with regard to resource allocation and public health service delivery. The scope of this study covers the Southern Nations, Nationalities and Peoples Regional State of Ethiopia and its relationship with the Cheha District in the area of health service decentralization. The objective of this study was to identify fundamental elements of decentralization of health institutions and the impact on the performance of the health system at local government level in the Cheha District in Ethiopia. The specific objective of this study was to find out how the provision and delivery of health services are related to decentralization policies, analyze and discuss the federal, national and local policies for health service decentralization and their significance for health service delivery. An additional aspect of this study is to provide some insights into intergovernmental relations as far as health service decentralization is concerned and, to this effect, this study applied the principal agent approach. In this study health service decentralization policies in Ethiopia at national and local levels were analyzed to gather information relating to the service delivery process. Most of the data for the study was collected during field research conducted between August and November 2005. During the field research, interviews were conducted with experts, community members and government officials both at the local and national level. The field research also focused on collecting data which is relevant to explain the relationship of the principal, in this case the Federal Ministry of Health and the SNNPRS Health Bureau at the regional government level and its agent, the Cheha District Health Office. The field research also identified the different mechanisms, tools, and institutional arrangements that exist in SNNPRS and the Cheha District to achieve the broader objective of the health system.