Treasury takes a hit from draft law

Treasury will from next year be required to set aside billions of shillings from the national budget to supply water and electricity, build roads, and health facilities in Kenya’s under-developed regions if on-going constitution making efforts run to completion.

The Committee of Experts has included into the new law, a clause that will require the Finance minister to allocate 0.5 per cent of total national revenues “marginalised areas” every year.

The provision appears to have been inspired by the yawning gap between Kenya’s wealthy - who have had a relatively easier access to national resources and the impoverished - who have historically suffered economic exclusion.

Money set aside under this clause will be put into a special “equalisation fund” for a period of 20 years when it will be due for a six-year extension granted by Parliament.

“The national government shall use the equalisation fund to provide basic services to marginalised areas to the extent necessary to bring the quality of those services to the level generally enjoyed by the rest of the nation,” says the provision in the draft document prepared by the Committee of Experts (CoE).

The provision further erodes Treasury’s powers over revenue allocation leaving it in a narrow policy corridor.

At the current revenue collection target of Sh569.6 billion, the equalisation kitty would receive Sh2.8 billion, up from Sh2.7 billion in the 2008/09 financial year in which the State collected Sh546.5 billion in revenue (taxes and grants).

Kenyans have persisted in their demand for a dispersal of State resources to atone for glaring economic disparities that have been attributed to unequal sharing of the national cake.

Decentralisation is critical to the proposed constitution, whose passing will see at least 15 per cent of the total national revenue go to the 47 counties every year.

The public finance also contains clauses that will ensure balanced sharing of national revenue, limiting Treasury’s discretion as the sole body that draws up the budget.

Finance and constitutional experts supported creation of the equalisation kitty- a new addition to the Naivasha draft - but also called for adequate mechanisms to safeguard against mis-allocations.

“The problem in Kenya is that we appear to have too many funds and this creates opportunities for leakages,” said John Akoten, an economist with the Institute of Policy Analysis and Research (IPAR).

Besides the kitties created by the proposed constitution such as the Consolidated Fund, the proposed ‘county governments revenue fund’ and a new ‘contingencies’ fund, there already exists legally entrenched funds such as the women, youth, constituency development fund and the local authorities transfer funds. “All these funds should be put into one basket to minimize duplication of roles,” said Dr Akoten.

When Parliament sits to pass new laws to bring the new constitution into force, it is expected to deal with thorny issues such as overlapping statutory bodies.

Peter Wanyama, an advocate with Mohammed & Muigai law firm says the identification of “marginalised” groups may also prove controversial unless a clear formula is written into law.

The draft defines marginalised communities or groups as those “that have experienced only marginal participation in the integrated social and economic life of the republic.”

But Mr Wanyama reckons that including such special provisions in the constitution may create legal ambiguities that can be used to stall the execution of the national budget as numerous groups claim marginalisation. “Even people with a different sexual orientation can claim to be marginalised,” said Mr Wanyama.

He said that such funds may not serve the intended purpose unless the method of disbursement is clearly defined. “Otherwise they may also end up lining politicians’ and civil servants’ pockets just as it has been in the past.”

Prof Terry Ryan, a consultant economist at Treasury and member of Central Bank’s monetary policy committee, said it was critical for the constitution should leave enough room for the Finance minister to allocate resources in line with economic realities of the day.

He said having a constitution that forces the minister to consult parliament before making expenditure proposals and at the same time setting aside substantial funds from the national kitty may create a lame duck Treasury that cannot formulate policies to influence growth.

“Treasury must have a role that is not subservient, it must have teeth,” said Prof Ryan in an interview.

Only parliament can make any further changes to the draft constitution now through amendments backed by a two thirds majority vote.

If Parliament votes for the proposed amendments, the draft will go back to the Committee of Experts for fine-tuning before being put to the popular vote in a national referendum.

It remains to be seen whether Parliament will leave intact the clause in the proposed law that takes away MPs’ powers to increase their own salaries and brings them under the tax net.

The legislators have in recent years attracted public outrage for repeatedly raising their salaries and tax-free allowances even during difficult economic times.

But if the draft is passed into law in the current form, a Salaries and Remuneration Commission will be created and mandated to set and review regularly the remuneration and benefits of all state officers. State officers are defined in the draft as “a person holding a state office,” which includes constitutional and legal office holders such as the President and his deputy, cabinet ministers, MPs, and the judiciary.

The new constitution forbids the exemption of any state officer from paying tax, meaning MPs and other constitutional office holders such as judges, who currently enjoy the privilege, will be obliged to pay up like other Kenyans.

Prof Ryan said though the Salaries Commission will help rationalise government expenditure on salaries, it is not desirable to have a standing committee for a task that is only occasional.

Kenya’s total public wage bill stood at Sh225.4 billion int 2008, just about nine per cent of the GDP and way above the five per cent threshold recommended by economic experts.

The revised draft constitution also provides for the creation of Treasury as the office that shall control use of public resources.

Public finance experts had expressed concerns that the creation of new budgeting structures and independent bodies to oversee resource mobilisation and revenue sharing could rob Treasury of the instruments it has traditionally used to ensure balanced growth and secure the economy from threats such as inflation, high interest rates and mass unemployment.